Statistics and analyses
Risk Outlook
8
October 2014
The Risk Outlook analyses the current economic situation
and the trends in financial markets in order to
identify the main risks affecting the achievement
of Consob's institutional objectives.
This report is based on data available as of September 2014
obtained from sources considered reliable,
but for which the completeness and accuracy cannot be guaranteed.
Full or partial copying, distribution and reproduction of this report
is subject to prior written authorisation by Consob.
The opinions expressed in the Risk Outlook are the authors’
personal views and are in no way binding on Consob.
This report was prepared by:
Nadia Linciano (coordinator)
Valeria Caivano
Francesco Fancello
Monica Gentile
Matteo Modena
Lucia Pierantoni
Eugenia Della Libera
The authors wish to thank Paola Soccorso and Antonio Ianni for their contribution to
Section 2.
For information and clarification
write to: [email protected].
ISSN 2281-3497 (online)
Risk Outlook
8
3
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
La congiuntura e i rischi
Nel 2014, gli indici azionari dei maggiori paesi avanzati hanno registrato andamenti
eterogenei e discontinui. Fino ad agosto, Stati Uniti, Regno Unito e area euro hanno
mostrato performance positive (con incrementi pari, rispettivamente, all’8%, 2% e 1%),
mentre il Giappone ha sperimentato un lieve calo (attorno al 2%). Nell’area euro, a fronte di
una leggera correzione al ribasso intervenuta sul mercato tedesco (-1%), Italia e Spagna
sono cresciuti (del 7,8% e 8,2%, rispettivamente), pur continuando a rimanere ampiamente
al di sotto dei livelli del 2007, in particolare nel settore bancario. Dall’inizio di settembre,
invece, tutti i maggiori mercati hanno sperimentato una improvvisa inversione di tendenza,
che nell’area euro ha portato a cali oscillanti tra il 5% e il 7%. La fiducia degli operatori è
stata intaccata dal crescente clima di incertezza, segnalato da molti indicatori
macroeconomici inferiori alle attese, dalla persistente debolezza della domanda interna in
molti paesi e dalle crescenti tensioni geopolitiche (tra cui quelle connesse alla crisi nell’est
Europa e all’impatto, sull’economia europea, delle sanzioni alla Russia); più di recente, i
segnali di rallentamento dell’economia tedesca sono diventati una ulteriore fonte di
preoccupazione. Il credito bancario ha continuato a calare, anche a fronte di una bassa
domanda di finanziamento da parte delle imprese. A partire da maggio, infatti, gli indici di
fiducia dei mercati, stimati sulla base dell’andamento dei corsi azionari, hanno mostrato
una correzione al ribasso, lieve nell’area euro e più marcata in Italia dove, dopo il picco
registrato a inizio anno, il sentiment degli investitori ha visto un brusco calo. Anche gli
indicatori di contagio hanno sperimentato un rapido incremento, in un contesto in cui la
bassa crescita economica e le pressioni deflazionistiche emerse nell’area euro hanno
alimentato le aspettative di ulteriori interventi espansivi da parte della BCE.
Il livello estremamente contenuto dei tassi di interesse e l’elevata liquidità connessi a
politiche monetarie accomodanti sollevano il rischio che i prezzi delle attività finanziarie
raggiungano livelli non coerenti con il ciclo economico. Nei mercati azionari dell’area euro,
gli indicatori di mispricing (stimati sulla base del tasso di crescita del Pil, dell’earnings per
share e del premio al rischio) segnalano una valutazione delle imprese generalmente in
linea con i fondamentali economici, sia nel settore non finanziario sia in quello bancario.
Fanno eccezione gli istituti di credito italiani, per i quali le quotazioni di mercato risultano
superiori a quelle teoriche, probabilmente per effetto di aspettative positive circa le
prospettive del sistema bancario italiano alimentate anche dalla “pulizia” dei bilanci
effettuata in vista dell’attuazione del Single Supervisory Mechanism (SSM) e dagli aumenti
di capitale realizzati nella prima metà dell’anno.
Nei mercati obbligazionari corporate, continua la dinamica discendente dei rendimenti in
tutti i settori e tutte le categorie di rischio, a fronte di una volatilità attestatasi a livelli
storicamente molto bassi. Tale dinamica è risultata più accentuata in Europa, dove i
rendimenti sono scesi attorno al 2% per i titoli con rating inferiore alla BBB e attorno
all’1% per quelli con un merito di credito superiore. In questo quadro, nella prima metà del
Risk Outlook
8
4
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
2014 le emissioni di obbligazioni non-investment grade (ossia con rating inferiore a BBB) da
parte di imprese europee sono aumentate, portandosi al 26% (19% nel 2013).
Con riferimento al mercato secondario dei titoli pubblici, rispetto all’inizio dell’anno, tutti i
principali paesi dell’area euro hanno assistito a una significativa riduzione dei rendimenti su
tutte le scadenze e, in misura più accentuata, su quelle a lungo termine. Tale tendenza si è
accompagnata a una generalizzata riduzione del rischio sovrano percepito dai mercati,
come confermato anche dai rating impliciti nell’andamento dei rendimenti obbligazionari e
dei prezzi dei CDS, attestatisi su livelli superiori al rating ufficiale dell’agenzia Moody’s.
La discesa dei rendimenti dei titoli pubblici e degli spread è stata in parte connessa alla
ripresa economica di alcuni paesi europei periferici: in particolare, Irlanda e Portogallo
hanno terminato il programma di aiuti concordato a livello europeo e sono ritornati sui
mercati, mentre la Spagna ha perfezionato la ristrutturazione del sistema bancario
domestico avviata grazie ai fondi di salvataggio europei. L’impatto maggiore è riconducibile,
tuttavia, alle misure non convenzionali annunciate dalla BCE, ossia le prime due TLTRO e i
programmi di acquisto di ABS e obbligazioni bancarie garantite: tali operazioni
comporteranno una nuova espansione del bilancio della Banca centrale, dopo la contrazione
di circa 1000 miliardi di euro connessa al rimborso anticipato dei fondi erogati in occasione
delle LTRO condotte nel 2012. Infine, la dinamica dei rendimenti delle obbligazioni
governative è ascrivibile anche alle crescenti tensioni geopolitiche, a fronte delle quali si è
cresciuta la propensione a investire in strumenti percepiti a basso rischio, quali i titoli di
Stato.
Nella prima parte dell’anno, la redditività delle maggiori banche europee rispetto agli attivi
ponderati per il rischio è aumentata, dopo il calo del 2013 ascrivibile alle significative
svalutazioni di crediti dubbi e avviamento effettuate dagli istituti di credito in vista
dell’Asset Quality Review e dello stress test dell’EBA. Nello stesso periodo l’adeguatezza
patrimoniale si è ridotta per tutte le maggiori banche, sebbene i nuovi coefficienti di
solvibilità non siano pienamente comparabili con i precedenti a causa dell’entrata in vigore,
da inizio anno, della nuova disciplina prudenziale di Basilea 3, contenuta nel pacchetto di
norme europee denominato CRD IV-CRR. Solo le banche italiane hanno mostrato un
incremento del tier 1 ratio, anche grazie alle significative ricapitalizzazioni effettuate sul
mercato (circa 9 miliardi di euro nei primi sei mesi del 2014).
In Italia e Spagna, si è assistito a un rallentamento del deterioramento della qualità del
credito, con un tasso di crescita delle sofferenze risultato negativo per la prima volta dal
2011. Inoltre, per la prima volta dal 2007 sono migliorate le condizioni di accesso al credito
sia per le famiglie sia per le imprese, come si evince dall’indagine trimestrale BCE. Si sono
ridotte, infine, le disomogeneità tra paesi nell’accesso al credito bancario, circostanza che
indica una graduale riduzione della frammentazione dei mercati europei. Nonostante questi
segnali incoraggianti, in Italia e Spagna il credito effettivamente erogato alle imprese ha
Risk Outlook
8
5
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
continuato a calare (del 5 e 10% rispettivamente), mentre i tassi di interesse sui nuovi
prestiti, sebbene in diminuzione, sono rimasti su livelli più elevati rispetto a Francia e
Germania.
La contrazione del credito bancario riflette anche la debolezza della domanda di credito,
che nelle maggiori economie europee ha registrato un tasso di crescita prossimo allo zero
nel primo semestre del 2014, dopo essere risultato in forte calo a partire dal 2011. Questo
andamento riflette il persistere di aspettative sfavorevoli circa una buona ripresa
economica, come emerge dall’andamento degli indici di fiducia, che continuano a essere
negativi nei principali paesi europei. La redditività delle imprese non finanziarie resta
ampiamente inferiore ai livelli del 2007, mentre l’Italia continua a caratterizzarsi per il più
alto numero di imprese in perdita rispetto ai competitors europei. Inoltre, in tutti i principali
paesi, più dell’80% delle grandi imprese mostra una variazione dei ricavi inferiore alla
media degli ultimi 10 anni.
La debolezza e l’eterogeneità del quadro macroeconomico nei paesi dell’eurozona si riflette
sui parametri di finanza pubblica, compromettendo la sostenibilità dei vincoli europei
introdotti dal Patto di Stabilità e Crescita (PSC) anche per le relative implicazioni per le
prospettive di ripresa. Il PSC, modificato nel 2010 al fine di mitigare i rischi di ulteriori crisi
del debito sovrano in Europa, richiede che il debito pubblico in eccesso rispetto al 60% del
Pil venga ridotto ad un tasso annuo pari, approssimativamente, a un ventesimo del debito
eccedente. Tuttavia questo vincolo potrebbe comportare correzioni significative della spesa
pubblica in molti paesi europei, la cui economia risulta ancora troppo fragile. Con
riferimento all’Italia, il pieno rispetto dei parametri introdotti dal Fiscal Compact
richiederebbe un avanzo primario pari al 4% del Pil (circa il doppio del valore storico) in uno
scenario di base che prevede una crescita del Pil dello 0,85% e un tasso di interesse al
2,2%. In Francia, invece, l’avanzo primario dovrebbe risultare pari allo 0,7% del Pil (con un
tasso di crescita del prodotto dello 0,95% e un tasso di interesse allo 0,5%) a fronte di un
disavanzo storico dell’1,2% e delle difficoltà, già annunciate dal governo, di rispettare
l’obiettivo di riduzione del deficit a un livello inferiore al 3% del PIL nei tempi concordati in
ambito europeo.
In conclusione, dopo aver sperimentato condizioni complessivamente favorevoli grazie
soprattutto alla politica monetaria accomodante, i mercati finanziari sono tornati ad
esprimere maggiore cautela a fronte di un sistema finanziario europeo ancora esposto a
molteplici rischi. La debole crescita economica, la fragilità delle finanze pubbliche e il
persistere di tassi di interesse bassi che comprimono il premio al rischio richiesto dagli
investitori potrebbero innescare, infatti, improvvise correzioni nei prezzi, compromettendo il
sentiero di stabilizzazione che i mercati sembravano aver imboccato nei primi mesi
dell’anno.
Risk Outlook
8
6
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Trends and risks
In 2014, equity markets recorded uneven and discontinuous performances across the main
developed countries. In the first eight months, US, UK and euro area showed positive
performances (around 8%, 2% and 1%, respectively), while the Japanese stock index
experienced a slight decrease (around 2%). Within the euro area the German equity market
experienced a downward correction (-1%), whilst Italy and Spain exhibited an upward trend
(7.8 and 8.2% respectively). Except for Germany, all general stock indexes, and even more
bank indexes, remained far below their 2007 levels. Since the beginning of September, all
major advanced countries have been showing an abrupt correction, with the main Eurozone
stock indexes suffering a drop ranging between 5% and 7%. In the euro area, investors’
confidence took a hit after the release of several disappointing economic data, displaying
an economy struggling against subdued domestic demand in many countries, weak public
and private balance sheets, low levels of bank lending and credit demand, geopolitical
tensions (such as the impact of Russia-related sanctions) and the reluctance of firms to
invest in an uncertain business environment. More recently, the evidence on German
economy slowing down is a further concern for the robustness of the euro area outlook.
In particular, the market sentiment indicator, as implied by stock market returns, has
suffered a moderate correction since May, whereas in Italy, after a notable peak in early
2014, it sharply plummeted driven by thwarted expectations of a strong recovery.
Consistently, signals of soaring financial contagion have rapidly strengthened in the first
half of the year, when weakening activity and disinflationary pressures heightened
investors’ expectations on the ECB engaging in further expansionary measures.
Low interest rate environment and high liquidity levels supported by accommodative
monetary policies may push asset prices upward, far beyond their fundamentals. In the euro
area, market valuation of non-financial firms of the main economies do not seem to be
especially stretched, as shown by our estimates of a mispricing indicator taking into
account the trends in domestic GDP, the earnings per share and risk premiums. This holds
for bank stocks’ as well, with the exception of Italy where actual prices above theoretical
values and high price-earnings ratios might reflect expectations about a positive
development of Italian banks’ outlook. This sentiment was probably driven by the balance
sheet clean-up, undertaken ahead of the start of Single Supervisory Mechanism, and by the
significant recapitalization via equity achieved by the major banking groups in the first half
of the year.
In fixed income markets, corporate bond yields are now at historically low levels for all
sectors and risk categories. The phenomenon is more pronounced in Europe, where yields of
non-investment grade corporate bonds fell down around 2%, and those of higher rated
bonds around 1%. The descending trend of bond yields caused an increase in the share of
non investment grade bonds on total issuance in Europe, from 19% in 2013 to 26% in the
first half of 2014. As for government bonds, relative to the beginning of the year, all major
euro area countries have experienced a significant yields’ reduction along the entire
Risk Outlook
8
7
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
maturity spectrum as well as a flattening of the yield curves. This pattern was coupled with
an improvement in the perception of the sovereign risk, as signaled by the bond and CDS
implied ratings, whose levels rose further with respect to Moody’s official rating. The
lowering of bond yields and credit spreads was partly driven by the economic recovery
experienced by some peripheral countries, which either exited their EU/IMF support
programmes and returned to capital markets (Ireland and Portugal), or consolidated the
domestic banking sector, after benefiting of the ESM support (Spain), but mostly by the
new non-conventional policy measures announced in August by the ECB (two TLTRO for
about 400 billion euro and an ABS and CB repurchase program, both aimed at re-expanding
the ECB balance sheet, which had contracted by about 1 trillion euro since 2011 because of
the early repayment of the two LTRO conducted in 2012). The demand for safe assets
prompted by the escalation of geopolitical risks also contributed to drive euro area
sovereign bond yields to record-low level.
In the first half of 2014, profitability relative to risk weighted assets of the major European
banks rose after the steep drop recorded in 2013, when pre-emptive balance-sheet cleanup
and de-risking measures were undertaken ahead of AQR and EU-wide stress test. Over the
same period, the capital adequacy coefficients dropped for all major European banks,
following the phase in of the new transitional national rules enacting the CRD IV-CRR
package, although the 2014 figures are not directly comparable with the previous ones. The
only exception were Italian banks, which in 2014 undertook a heavy recapitalization via
equity issuance (about nine billion euros). From January to June 2014, credit quality
deterioration has significantly slowed down, especially in Italy and Spain, for the first time
since 2011. In this framework, credit conditions for bank loans to households and firms has
marked a progress: in the second quarter of 2014, as shown by the ECB lending survey, the
net percentage of banks reporting a tightening in credit standards has become negative for
the first time since 2007. Moreover, as an early signal of a gradual reversion in the financial
fragmentation within the euro area, cross-country disparities in the overall conditions of
lending supply to firms have decreased during the year. However, both in Italy and Spain
bank loans to non-financial corporations continued to fall (by 5% and 10% respectively),
while interest rates (both for large and small-medium size loans) record a persistent,
although narrowing, gap with respect to the rates charged in France and Germany.
Negative trends in the demand of credit, mirroring expectations of a slow recovery, are
persistent. Business confidence keeps being negative in the main euro area countries. Nonfinancial firms’ profitability is still far below the 2007 levels, and Italy once again exhibits
the highest percentage of loss-making companies relative to their European peers.
Moreover, in all the main European countries more than 80% of the largest non-financial
companies show a turnover change below the 10-year average, confirming the gloomy
state of the euro area economic activity. As a consequence, the demand of credit of nonfinancial corporations keeps being very weak (recording growth rates close to zero),
although it shows a slight recovery after the significant contraction experienced since
2011.
Risk Outlook
8
8
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
The persistently feeble economic activity may feedback negatively on public finance
sustainability in the Eurozone and the application of the Stability and Growth Pact (SGP)
raises concerns on its implication for the recovery prospects. The SPG, amended after 2010
in order to ward further debt crises off, requires that the general government debt ratio in
excess of 60% of GDP has to be reduced approximately by 1/20th of the excess over 60%
per year. However, this provision may entail significant and unsustainable adjustments for
the public finances of the main Eurozone countries, still under strain. As for Italy, fulfilling
the Fiscal Compact requirements would imply a primary surplus equal to 4% of GDP (2
times higher than its historical value) in a baseline scenario with GDP growing by 0.85%
and interest rate equal to 2.2%, while France should record a primary balance of 0.7% (if
GDP growth were equal to 0.95% and interest rate were equal to 0.5%), against a historical
average equal to -1.2%. France has already pointed out the unsustainability of SGP
commitments, by announcing that its 2015 Budget (to be officially submitted to the
European Commission’s scrutiny on October 15th) will postpone the required reduction of
the deficit below 3% of GDP.
In conclusion, after having experienced overall benign conditions mainly driven by the ECB
policy announcements, the euro area equity markets are now retracing back towards a more
cautious mood, in the wake of a wide range of risks still challenging financial stability.
Indeed, an abrupt price correction could be triggered by the weak economic growth, the
persistent public finance fragility, a low interest rates environment and excessively low risk
premia.
Risk Outlook
8
9
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Risk dashboards
Sovereign risk indicator
Greece
222223323223222233333333333333222333333333333333333333333333333333333333333333333333333333333
Ireland
Portugal
Spain
Italy
11122222222222223332232233333333333333233333333333333333333333333333332
21211112111
22222322222222223332331122222211111122233333333333333333333333333333333
33333333333
21222322222221222332331121112111111111112221223333333333333333333333333
333223322122
332111111
222223323222222233333322222222111111111122111133333333333333333333333322233122222212
France
Germany
United Kingdom
United States
21222322222211122322221111111111111111110110001111111110011110010000000
00000000000
21122222222211122222111111111111111111110000000011111100000000000000000
00000000000
33333333333222233332221111111111111211111110111111111100000000000000000
00000000000
32333332221111111111111001011111111111111000000111111100000000000000000
00000000000
2007
2008
2009
2010
low risk
2011
2012
2013
2014
high risk
Source: calculations on Thomson Reuters data. The risk in computed on the basis of the historical distribution of
10-year sovereign yields.
Gross issuance activity indicator by sector
banks
2 2 2 1 2 3 2 2 3 3 3 1 1 1 1 2 2 1 1 1 1 0 0 2 3 3 2 2 3 2 1 1 2 2 1 2 0 0 1 0 1 2 1 2 2 2 1 2 2 1 1 3 2 1 2 0 0 1 2 2 1 1 2 0 1 1 1 2 2 1 1 2 1 2 1 1 2 1
US
industrials
1 1 2 1 2 2 2 3 3 3 2 1 1 1 0 2 1 1 0 0 0 1 1 2 2 3 2 1 3 3 2 1 1 1 1 1 1 1 1 2 0 1 3 2 2 3 2 2 2 1 1 2 2 1 0 1 1 0 1 0 1 2 2 2 1 2 2 2 1 2 2 2 2 2 1 2 2 1
MBS
3 2 3 3 3 2 3 2 3 3 3 2 2 2 2 1 1 1 1 0 0 0 0 0 0 0 0 1 1 2 1 1 1 1 1 1 2 1 2 2 1 1 2 2 2 2 2 2 2 2 1 2 2 2 1 1 2 1 1 1 1 1 1 1 1 1 1 2 2 2 1 1 2 1 2 2 2 2
banks
2 2 3 2 1 2 1 1 1 1 1 0 1 0 1 1 1 2 2 1 2 2 1 2 1 2 1 2 3 2 2 2 0 1 2 2 1 0 1 1 0 2 2 3 3 2 1 0 2 1 2 2 2 0 1 1 1 2 2 3 2 3 3 1 2 3 2 2 2 1 1 1 2 1 1 1 1 0
Europe
industrials
2 3 2 2 1 2 2 0 1 3 1 1 0 0 1 1 2 1 0 2 1 1 2 2 2 3 2 2 3 3 3 2 2 1 1 3 2 1 1 2 0 1 2 2 2 1 0 0 1 1 1 2 1 1 1 0 1 2 3 2 2 2 1 1 1 2 1 2 2 2 1 2 1 1 2 2 1 1
MBS
2 2 2 1 2 1 1 0 0 1 0 1 0 1 2 3 1 3 2 2 2 2 2 3 1 1 0 1 2 1 1 2 1 2 0 1 3 2 2 1 1 1 2 1 2 1 2 0 0 1 2 2 1 2 2 1 1 2 3 3 1 3 1 1 2 1 1 2 2 2 2 2 2 1 1 3 2 1
2008
2009
2010
2011
high activity
2012
2013
2014
low activity
Source: calculations on Dealogic data. The indicator is computed by comparing gross issuance of the period with
its historical distribution and it is estimated by correcting for outliers.
Credit risk indicator
banks
US
insurance
non-financial
firms
banks
Euro
insurance
area
non-financial
firms
2007
low risk
2008
2009
2010
2011
2012
2013
2014
high risk
Source: our calculations on Thomson Reuters data. The risk level is computed on the basis of the historical
distribution of CDS Thomson Reuters price indexes.
Risk Outlook
8
10
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Equity markets
In 2014, equity markets recorded uneven and discontinuous performances across the main developed
countries (Fig 1.1). In the first eight months, US, UK and euro area showed positive performances
(around 8%, 2% and 1%, respectively), while the Japanese stock index experienced a slight decrease
(around 2%). Within the euro area (Fig 1.2) the German equity market experienced a downward
correction (-1%), whilst Italy and Spain exhibited an upward trend (7.8% and 8.2% respectively).
Except for Germany, all general stock indexes, and even more bank indexes, remained far below their
2007 levels. Since the beginning of September, all major advanced countries have been showing an
abrupt correction. In the main euro area countries, German and French stock indexes suffered a drop
(by about 7%), while Italy and Spain exhibited the decrease was less marked (around -6% and -5%
respectively). In Europe, financial contagion has rapidly grown in the first half of 2014, due to the
weak economic outlook and to geopolitical tensions, while in the third quarter it dropped in the wake
of the ECB monetary policy actions, including Targeted Long Term Refinancing Operations (TLTROs)
and the announcement of a purchase programme of ABS and covered bonds (Fig 1.4). During the first
TLTRO a total of 82 billions of euro was allotted to European credit institutions (the total amount of
liquidity injected was 48 billions net of repayments on three years LTRO). Consistently with soaring
contagion, during 2014 the investors’ perception of extreme events risk recorded an upward trend
both in the Eurozone and in Italy. During 2014, the indicator of herding behavior remained
substantially stable at 2013 levels in the non-financial sector, signaling a general propensity not to
undertake imitative strategies, whilst recording a new spike around mid-year in the banking sector
(Fig 1.5). On the other side, information efficiency has shown a clear-cut further improvement across
all sectors. The market sentiment indicator, as implied by stock market returns, has suffered a
moderate downward correction since May, whereas in Italy, after a notable peak in early 2014, it
sharply plummeted driven by thwarted expectations of a strong recovery (Fig 1.6). During 2014, both
volatility and turnover ratios have fallen in the main advanced economies (Fig 1.7 e Fig 1.8). Liquidity
conditions remained at high level in the euro area, while worsening in the Italian market (Fig. 1.9). As
for stock valuation, in 2014 price-earnings ratios showed a negative correction across bank and
corporate sectors, due to the upward stock price dynamics as well as to the sluggish earnings’ figures.
For Italian and Spanish banks, such correction follows the significant upswing started in 2013 in the
wake of the divergent pattern recorded by rising prices and falling earnings (Fig 1.11). At the end of
September 2014, the stock observed prices are in line with their theoretical values, estimated on the
basis of earnings per share and risk premiums, across the major euro area countries (Fig 1.12 and Fig
1.13). The only exception was Italy, and in particular the Italian banking sector, where the discrepancy
between observed and theoretical prices might reflect expectations about a positive development of
Italian banks’ fundamentals. This sentiment was probably driven by the balance sheet clean-up,
undertaken ahead of the start of Single Supervisory Mechanism, and by the significant
recapitalization via equity achieved by the major banking groups in the first half of the year.
Risk Outlook
8
11
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
At the end of September
2014, equity markets of
developed countries have
basically levelled off, except
in the US and the UK. In the
euro area (recording an
increase of about 1%), the
marginal downward
correction occurred during
the summer term mirrors
the uncertain expectations
of a sound recovery.
All general stock indexes,
except for Germany, remain
far below their 2007 levels;
this is particularly
pronounced for the bank
sector.
Figure 1.1 – Advanced countries stock indexes
(daily data; 01/01/2007 - 10/10/2014; 01/01/2007 = 100)
whole market
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
banks
110
USA
Japan
100
90
Euro area
UK
80
70
60
50
40
30
20
10
2007
2008
2009
2010
2011
2012
2013
2014
0
2007
2008
2009
2010
2011
2012
2013
2014
Source: Thomson Reuters Datastream. The left graph includes the following indexes: S&P500 (US), Topix (Japan),
FTSE100 (UK), Euro Stoxx 50 (euro area). The right graph includes the following indexes: S&P500 Banks, Euro
Stoxx Banks, Japan FTSE Banks and UK FTSE Banks.
Figure 1.2 – Euro area stock indexes
(daily data; 01/01/2007 - 10/10/2014; 01/01/2007 = 100)
whole market
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
banks
110
100
90
Germany
France
Italy
Spain
80
70
60
50
40
30
20
10
2007
2008
2009
2010
2011
2012
2013
2014
0
2007
2008
2009
2010
2011
2012
2013
2014
Source: Thomson Reuters Datastream. The left graph includes the following indexes: the Dax30 (Germany), Cac40
(France), Ibex35 (Spain), FTSE Mib (Italy). The right graph includes the FTSE Banks indexes for France, Germany,
Italy and Spain.
In 2014, financial contagion
at the global level has
remained relatively low,
although showing a
moderate spike in June, and
is now back to the early
2013 levels.
Although historical
volatility has reduced in
almost all emerging
markets, Argentina is
experiencing a peak in
volatility, coupled with the
outstanding performance of
the Merval Index, which has
doubled since the beginning
of the year.
Figure 1.3 – Financial contagion in a global perspective
(percentage values; daily data; 01/01/2007 - 30/09/2014)
historical volatility
(annualised percentage values)
percentage of long-run connections
among stock markets
50%
450%
400%
40%
Brazil
India
China
Argentina
350%
300%
30%
250%
200%
20%
150%
100%
10%
50%
0%
0%
2007
2008
2009
2010
2011
2012
2013
2014
2007
2008
2009
2010
2011
2012
2013
2014
For the estimation of the contagion indicator the daily returns of the following stock indexes were considered:
Merval (Argentina), Bovespa (Brazil), Micex (Russia), Sensex (India), Shenzhen SE (China), MSCI Turkey, S&P500
(US), Euro Stoxx 50 (euro area), FTSE100 (UK) and Topix (Japan) (left graph; for the methodology see Consob
Working paper no. 72, 2012). The annualized historical stock index return volatility has been estimated by
applying a multivariate Garch model (right graph). Two month moving average are reported for both the
contagion and the risk perception indicators. Calculations are based on Thomson Reuters Datastream data.
Risk Outlook
8
12
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In Europe, financial
contagion has rapidly grown
in the first half of 2014,
while in the third quarter it
dropped in the wake of the
ECB monetary policy actions
and the announcement of
a purchase programme of
ABS and a new purchase
programme of covered
bonds. Due to the weak
economic outlook and to
geopolitical tensions, during
2014 the investors’
perception of extreme
events risk recorded an
upward trend both in the
Eurozone and in Italy.
During 2014, the indicator
of herding behavior
remained substantially
stable at 2013 levels in the
non-financial sector,
signaling a general
propensity not to undertake
imitative strategies, whilst
recording a new spike
around mid-year in the
banking sector.
On the other side,
information efficiency has
shown a clear-cut further
improvement across all
sectors.
Figure 1.4 – Financial contagion and investors perception of extreme events risk in Europe
(percentage values; daily data; 01/01/2007 - 30/09/2014)
percentage of long-run connections
among stock markets in Europe
investors perception of extreme events risk
(risk reversal)
50%
20%
40%
16%
30%
12%
20%
8%
10%
4%
A
0%
2007
2008
banks
2009
2010
2011
2012
2013
2014
0%
B
2007
non financial firms
C
2008
2009
Euro area
2010
Italy
D E
2011
F
G
2012
2013
H I
2014
ECB actions
For the estimation of the contagion indicator the daily returns of the MSCI indexes of the UK, Germany, France,
Italy, Spain, Greece, Portugal, Ireland, the Netherlands, Austria and Finland were considered (left graph; for the
methodology see Consob Working paper no. 72, 2012). The indicator of risk reversal is defined as the difference
between the implied volatility of the put out of the money options and the implied volatility of the call out of the
money options with the same maturity (2 months) and characterized by the same risk premium sensitivity to the
variations of the underlying asset price (delta equal to 25); the sample includes options on the Euro Stoxx 50
index for the euro area and on the FTSE Mib index for Italy (right graph). Higher values of the risk reversal
indicator signals a higher perception of the risk of extreme negative returns. The unconventional policy measures
adopted by ECB and reported in the figure are : A) injection of liquidity (09/08/2007); B) swap agreement with
Fed to inject liquidity in US dollars in exchange of guarantees in euro (12/12/2007); c) Securities Market
Programme (09/05/2010); D) long-term refinancing operations (LTRO) (20/12/2011); E) LTRO (28/02/2012); F)
OMT announcement programme (26/07/2012); G) interest rates cut (07/11/2013); H) interest rates cut and TLTRO
announcement (05/06/2014); I) interest rates cut and ABSPP/CBPP3 announcement (04/09/2014). Two month
moving average are reported for both the contagion and the risk reversal indicator indicators. Calculations are
based on Thomson Reuters Datastream and Bloomberg data.
Figure 1.5 – Indicators of stock market herding behavior and information inefficiency in the
euro area
herding behavior
(3-months moving average; daily data; 01/01/2007 - 30/09/2014)
5
information inefficiency indicator
(monthly data; January 2007 - September 2014)
0,5
banks
non-financial firms
4
0,4
3
0,3
2
0,2
1
0,1
0
0
2007
2008
2009
2010
2011
2012
2013
2014
2007
2008
2009
2010
2011
2012
2013 2014
The indicator of herding behavior has been computed as the inverse of the cross-section standard deviation of
stock market returns of the main blue chips in the euro area (Chang, E., Cheng, J. and Khorana, A. 2000). A lower
dispersion (i.e. a higher level of the indicator) signals that the investors adopt more frequently similar or imitative
investment strategies and, therefore, that the herding behavior phenomenon is more intense. The information
inefficiency indicator is the absolute value of the first order stock index return autocorrelation. The indicators are
computed on euro area Datastream non-financial countries’ indexes and on Euro Stoxx Banks index. Calculations
are based on Thomson Reuters data.
Risk Outlook
8
13
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In the euro area, market
sentiment (as implied by
stock market returns) has
been showing a moderate
negative correction since
May, denoting a pessimistic
feeling about the economic
outlook. In Italy, after a
notable peak in early 2014,
the market sentiment
indicator has sharply
plummeted in the last few
months, when expectations
of a strong recovery have
been thwarted.
During 2014, volatility has
fallen to the pre-crisis levels
in US and Europe but in
Italy has remained stable to
higher values. The risk
aversion indicator, after a
slight decrease in the first
months of the year, has
started to rise again in line
with the fall in market
sentiment.
Figure 1.6 – Investors’ market sentiment as implied by stock market indexes dynamics in the
euro area
(monthly data; January 2007 – September 2014)
Euro area
Italy
1
1
0,8
0,8
0,6
0,6
0,4
0,4
0,2
0,2
whole market
banks
0
2007
2008
2009
2010
2011
2012
0
2013 2014
2007
2008
2009
2010
2011
2012
2013 2014
The market sentiment indicator has been estimated as the long-run component of the stock return (Andersson et
al., 2011). The cyclical component of each time series is normalized by scaling the indicator between zero (low
growth expected) and one (high growth expected). The indicator is computed by applying the Christiano
Fitzgerald filter. The stock indexes included in the sample are the FTSE Mib and the FTSE Banks for Italy and the
Euro Stoxx 50 and the Euro Stoxx Banks for the euro area. Calculations are based on Thomson Reuters data.
Figure 1.7 – Implied volatility and risk aversion indicator
aversion to risk indicator
(monthly daily data; Jan. 2007 - Sep. 2014; January 2007=100)
stock index volatility
(daily data; 01/01/2007 - 30/09/2014)
70%
1,500
60%
1,250
50%
USA
Euro area
Italy
1,000
40%
750
30%
500
20%
250
10%
0%
2007
2008
2009
2010
2011
2012
2013
2014
0
2007
2008
2009
2010
2011
2012
2013
2014
The risk aversion indicator has been estimated by comparing the historical distribution of stock returns with the
distribution implied by stock index option prices (Shimko, 1993); call and put options on S&P500 (USA), Euro
Stoxx 50 (euro area) and FTSE Mib (Italy) have been taken into consideration. Calculations are based on Thomson
Reuters Datastream data.
The reduction in stock
market volatility seems to
go hand in hand with a
reduction of turnover ratios
in all the major economies.
Figure 1.8 – Trading volume and turnover ratio
(monthly data; 4-months moving average; January 2007 – September 2014)
turnover ratio
(percentage values)
trading volume
(January 2007=100)
250
500
USA
Euro area
Italy
200
400
150
300
100
200
50
2007
2008
2009
2010
2011
2012
2013 2014
100
2007
2008
2009
2010
2011
2012
2013 2014
The trading volume has been deflated by using stock price indexes. The turnover indicator is computed as the
ratio between stock index monthly average trading volume and monthly average market value. The sample
includes the following indexes: S&P500 (US), Euro Stoxx 50 (euro area), FTSE Mib (Italy). Calculations are based
on Thomson Reuters Datastream.
Risk Outlook
8
14
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Liquidity conditions remain
at high level in the euro
area, while worsening in the
Italian market.
Figure 1.9 – Stock market illiquidity in the euro area
(daily data; 01/01/2007 - 30/09/2014)
Euro area
Italy
1
1
0,9
0,9
0,8
0,8
moving average (1 month)
0,7
0,7
0,6
0,6
75th percentile
0,5
0,5
0,4
0,4
0,3
0,3
0,2
0,2
0,1
0
illiquidity indicator
0
2008
2009
25th percentile
0,1
25th percentile
2007
75th percentile
2010
2011
2012
2013
2014
2007
2008
2009
2010
2011
2012
2013
2014
The illiquidity indicator is the first factor estimated by applying principal component analysis on four liquidity
measures of the Euro Stoxx 50 (euro area) and FTSE Mib (Italy) indexes, that is the price impact liquidity measure
(Amihud, 2002), the bid-ask spread, the implied and historical volatility (range indicator). The indicator has been
normalized between the lower bound equal to zero (= high liquidity) and the upper bound equal to one (= low
liquidity). Calculations are based on Thomson Reuters Datastream data.
The growth rate of the
earnings per share remain
negative for the main euro
area countries. Data
evidence suggests the
Spanish banking sector
recovering at a good pace;
whereas Italian banks’ EPS
moves along a clear-cut
downward sloping trend.
Figure 1.10 – Historical growth rate trends of earnings per share in the euro area
(monthly data; January 2007 - September 2014)
10%
banks
10%
5%
5%
0%
0%
-5%
-5%
-10%
-10%
-15%
2007
2008
2009
2010
2011
2012
2013 2014
-15%
non financial firms
2007
2008
2009
2010
Italy
France
Germany
Spain
2011
2012
2013
2014
Source: calculations on Thomson Reuters Datastream data for the main listed European banks (5 Italian groups, 5
French groups, 3 German groups, 7 Spanish groups). Corporate indicators are computed on each country
Datastream non financial index.
In 2014, the general
negative correction of
price-earnings ratios is due
to the upward stock price
dynamics as well as to the
sluggish earnings’ figures.
For Italian and Spanish
banks, such correction
follows the significant
upswing started in 2013 in
the wake of the divergent
pattern of rising prices and
falling earnings.
Figure 1.11 – Price-earnings ratio adjusted for the business cycle in the euro area
(monthly data; January 2007 – September 2014)
banks
non financial firms
40
40
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
2007
2008
2009
2010
2011
2012
2013 2014
0
2007
2008
2009
2010
Italy
France
Germany
Spain
2011
2012
2013 2014
Source: calculations on Thomson Reuters Datastream data for the main listed European banks (5 Italian groups, 5
French groups, 3 German groups, 7 Spanish groups). Corporate indicators are computed on each country
Datastream non financial index. The price-earnings ratio is calculated on the earnings per share adjusted for the
business cycle (Hodrick- Prescott filter).
Risk Outlook
8
15
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In 2014, eurozone bank
stock prices were in line
with theoretical values,
estimated on the basis of
earnings per share and risk
premiums. The only
exception was Italy, where
the upward trend in prices,
against falling earnings,
possibly incorporated
expectations about a
positive development of
Italian banks’ fundamentals.
Such sentiment was
probably driven by the
balance sheet clean-up
undertaken ahead of the
start of Single Supervisory
Mechanism (SSM) in
November, on one side, and
by the significant
recapitalization via equity
achieved in the first half of
the year, on the other side.
Figure 1.12 – Bank stock price boom and bust episodes in the euro area
(monthly data; January 2007 - September 2014)
France
Germany
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
-20%
-20%
-40%
-40%
-60%
-60%
-80%
2007
2008
2009
2010
2011
2012
2013
2014
-80%
Italy
80%
60%
60%
40%
40%
20%
20%
0%
0%
-20%
-20%
-40%
-40%
-60%
-60%
2007
2008
2009
2010
2011
2012
2013
2014
2008
2009
2010
2011
2012
2013
2014
Spain
80%
-80%
2007
2008
2009
2010
2011
2012
2013
2014
mispricing index
I° quartile mispricing index (significance lower bound)
III° quartile mispricing index (significance upper bound)
-80%
2007
overvaluation
undervaluation
The mispricing index is the percentage difference between the observed price and the fundamental value
(Campbell and Shiller, 1988; Nelson, 1999; De Bondt et al., 2010). Bank’s fundamental value has been estimated
by applying a VECM co-integration model on stock prices, earnings per share adjusted for the business cycle, and
risk premium (earnings yield premium). Undervaluation (overvaluation) with respect to the business cycle is
computed by estimating the time series of the I° quartile (III° quartile) of the stock index price distribution
conditioned on the GDP (trend component estimated by applying the Hodrick-Prescott filter). The indicator
°
,
°
,
p
; the indicators signals overvaluation if
signals undervaluation if p
(Quiros and Timmermann, 2001; Cassola and Morana, 2002; Detken and Smets, 2004). Calculations are based on
Thomson Reuters Datastream data for the main listed European banks (5 Italian groups, 5 French groups, 3
German groups, 7 Spanish groups).
Risk Outlook
8
16
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In the euro area, market
valuation of non-financial
firms of the main
economies do not seem to
be especially stretched, as
shown by the estimates of a
mispricing indicator taking
into account trends in
domestic GDP, earnings per
share and risk premiums.
Figure 1.13 – Non-financial firms price boom and bust episodes in the euro area
(monthly data; January 2007 - September 2014)
France
Germany
60%
60%
40%
40%
20%
20%
0%
0%
-20%
-20%
-40%
-40%
-60%
-60%
-80%
2007
2008
2009
2010
2011
2012
2013
-80%
2014
Italy
2008
2009
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
Spain
60%
60%
40%
40%
20%
20%
0%
0%
-20%
-20%
-40%
-40%
-60%
-60%
-80%
2007
2007
2008
2009
2010
2011
2012
2013
-80%
2014
2007
2008
2009
mispricing index
I° quartile mispricing index (significance lower bound)
overvaluation
III° quartile mispricing index (significance upper bound)
undervaluation
The mispricing index is the percentage difference between the observed price and the fundamental value
(Campbell and Shiller, 1988; Nelson, 1999; De Bondt et al., 2010). Non-financial firms fundamental value has
been estimated by applying a VECM co-integration model on stock prices, earnings per share adjusted for the
business cycle, and risk premium (earnings yield premium). Undervaluation (overvaluation) with respect to the
business cycle is computed by estimating the time series of the I° quartile (III° quartile) of the stock index price
distribution conditioned on the GDP (trend component estimated by applying the Hodrick-Prescott filter). The
indicator signals undervaluation if p
°
,
p
°
,
; the indicators signals overvaluation if
(Quiros and Timmermann, 2001; Cassola and Morana, 2002; Detken and Smets, 2004).
Calculations are based on Thomson Reuters Datastream data.
Risk Outlook
8
17
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Bonds markets
During 2014, in the euro area 10-year government bond yields and CDS sovereign 5-year risk premia
have continued their descending course, started in early 2012, towards record-low levels (Fig 2.1). In
the first months of the year, this pattern reflected expectations of a good economic recovery, then
disappointed. Since June, the main driver of the observed trend has been the announcement of
important ECB measures, aimed at improving the functioning of the monetary policy transmission
mechanism and supporting the provision of credit to a flagging economy. Over the same period, in
spite of the reduction of quantitative stimulus started by the Fed last December, US sovereign bond
yields have continued to follow a downward path, reflecting concerns about weak economic activity
in China, geo-political tension in Ukraine and deflation risk in Europe. Japanese bond yield were substantially stable, with the central bank maintaining its accommodative stance in spite of the moderate domestic recovery. In the European fixed income markets, conditional volatility has stabilized at
historical low levels, but contagion has returned back to early 2013 values, mirroring the comovement of long-term rates along a common declining trend. Most recent evidence, however,
suggests contagion declining in the near future (Fig 2.2). In 2014, all major industrialized countries
experienced a significant yields’ reduction as well as a flattening of the yield curves (Fig 2.3).
Moreover, the perception of insolvency risk implicit in government securities yields and CDS prices has
significantly improved for Italy, Spain and Greece. This trend was more marked for Ireland because of
its positive macroeconomic outlook and the ongoing fiscal consolidation, coupled with its return to
capital markets (Fig 2.4). The overall decline in sovereign risk perception combined with foreign
investors slightly increasing their exposures in sovereign bonds of peripheral eurozone countries, with
the exception of Spain (Fig 2.5). ECB holdings of euro area public debt declined, while resident banks
holdings slightly increased (Fig 2.6). Sovereign refinancing needs remain challenging in countries with
high stocks of debt (Fig 2.7). As for the path of debt-to-GDP ratio, in 2015 the Italian public debt is
expected to exceed 136% of GDP, while in France is forecast to reach almost 98% and in Spain
should rise to 101%. The primary deficit is the key driver for France and Spain, whilst Italy keeps being
penalised by the stock of debt and the gap between the growth rate and the interest rate (Fig 2.8).
The public finance adjustments required by the Fiscal Compact rules are significant for both peripheral
and core countries. As for Italy, in the baseline scenario (i.e. GDP growth equal to 0.85% and interest
rate equal to 2.2%) fulfilling the Fiscal Compact requirements would imply a primary surplus equal to
4% of GDP (2 times higher than its historical value), while France should record a primary balance of
0.7% (if GDP growth were equal to 0.95% and interest rate were equal to 0.5%), against a historical
average equal to -1.2% (Fig. 2.9). The GDP nowcasts for the third quarter of 2014 confirm that the
economic activity is slowing down in Italy and France, whilst Spain seems to exhibit a good recovery
and Germany appears to be stagnant (Fig. 2.10). In 2014, US corporate bond yields experienced a fall
only in the non-financial sector, whereas remained substantially stable in the bank sector. In Europe,
yields dropped for all corporate securities, albeit the decrease was more pronounced for non-financial
sector. The spread between non-investment grade and higher rated bonds held stable (Fig 2.11). In the
first half of 2014, the primary market of non-financial corporate bonds showed signs of a slowdown
both in the US and in Europe compared to the first half of 2013. On the contrary, in Italy net issuance
volumes in the first half of 2014 were 4 times higher than those recorded in the same period of the
previous year (Fig 2.12). This development probably signals the rising propensity of corporations to
turn to debt capital markets, in the wake of the enduring shrink in the availability of bank lending. As
for bank bond issuance, the activity was stagnant in the US and showed feeble signs of recovery in
Europe, whereas in Italy credit institutions increased their recourse to debt markets. Turning to the
refinancing needs, in the second half of 2014, maturing bank bond appear to be higher in Europe
(around 5% of the total issued in 2007) than in the US (equal to about 2%; Fig 2.13). Market for
securitized assets remained stagnant both in US and Europe. In Italy, only the issuance of mortgage
backed securities showed a slight recovery, while the net issuances of other securitized assets
continued to be negative (Fig 2.14).
Risk Outlook
8
18
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
During 2014, in the euro
area 10-year government
bond yields and CDS
sovereign 5-year risk premia
have continued their course
along the decreasing path
started in early 2012. This
pattern reflected the ECB
stimulative measures, aimed
at improving the
functioning of the monetary
policy transmission
mechanism and supporting
the provision of credit to a
flagging economy. In the
US, bond yields followed a
downward path, in spite of
the reduction of Fed’s
monthly bond purchases.
Japanese bond yield were
substantially stable, with
the central bank
maintaining its
accommodative stance.
Figure 2.1 – Government bond yields and CDS on public debt in advanced countries
(daily data; 01/01/2009 – 10/10/2014)
10-YEAR GOVERNMENT BOND YIELDS (percentage point)
18
5
Italy
Spain
France
Germany
Ireland
Portugal
16
14
12
UK
USA
Japan
4
3
10
8
2
6
4
1
2
0
2009
2010
2011
2012
2013
2014
0
2009
2010
2011
2012
2013
2014
5-YEAR SOVEREIGN CDS PREMIUMS (basis point)
1,600
1,400
1,200
1,000
180
Italy
Spain
France
Germany
Ireland
Portugal
UK
USA
150
Japan
120
800
90
600
60
400
30
200
0
2009
2010
2011
2012
2013
2014
0
2009
2010
2011
2012
2013
2014
Source: Thomson Reuters.
Although contagion has
returned significant in the
fixed income markets, back
to early 2013 values,
conditional volatility has
stabilized at historical low
levels. Soaring contagion
mirrors the important comovements shared by longterm rates along a common
declining trend. Most recent
evidence, however, suggests
contagion declining in the
near future.
Figure 2.2 – Contagion and historical volatility of 10-year sovereign bond spreads for some
European countries
(percentage values; 2-months moving average; daily data; 01/01/2007 - 30/09/2014)
percentage of long-run connections among markets
historical volatility
50%
80%
Lehman default
crisis
40%
subprime crisis
UK
70%
Euro area sovereign debt crisis
60%
core countries
peripheral countries
50%
30%
40%
20%
30%
20%
10%
10%
0%
2007
2008
2009
2010
2011
2012
2013
2014
0%
2007
2008
2009
2010
2011
2012
2013
2014
For the methodology applied to estimate the contagion indicator see Consob Working paper no. 72, 2012 (left
graph). On the left graph the percentage of statistically significant long-run relations among sovereign bond
spreads; the long-run connections have been detected by applying the bi-variate cointegration test of Johansen
(1988) with a rolling window of 1,000 days on the stock return time series. The countries included in the sample
are the UK, Germany, France, Austria, the Netherlands, Finland, Italy, Spain, Greece, Portugal and Ireland. The
right graph reports the average value of the annualised historical volatility of sovereign bond spreads which has
been estimated by applying a multivariate Garch model. The group of “core” countries include Germany, France,
Austria, the Netherlands and Finland, while the group of “peripheral” countries include Italy, Spain, Portugal and
Ireland. The sovereign spreads are computed by using US Treasury bond as the benchmark. Calculations are based
on Thomson Reuters data.
Risk Outlook
8
19
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Relative to the beginning of
the year, all major
industrialized countries have
experienced a significant
yields’ reduction along the
entire maturity spectrum as
well as a flattening of the
yield curves. Yields in
French and German shortterm government securities
have even fell into negative
territory. The expectations
of ECB policy actions
supporting economic
growth and the increased
demand for safe assets,
prompted by the escalation
of geopolitical risks, drove
eurozone sovereign bond
yields to record-low levels.
This pattern has twofold
interpretations. First, most
European countries seem to
move towards a liquidity
trap. Second, diminishing
long-term yields seem to be
ineffective in revitalising
the credit market and
stimulating the economic
activity.
Figure 2.3 – Yield curves in advanced countries
Italy
Spain
7%
7%
6%
6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y
3M 6M 9M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 30Y
France
Germany
7%
7%
6%
6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 20Y 30Y
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y
UK
US
7%
7%
6%
6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
3M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y
1st Nov. 2011
30th Jan. 2014
Source: calculations on Thomson Reuters data.
30th Sept. 2014
3M
6M
1Y
2Y
3Y
5Y
7Y
10Y
30Y
Risk Outlook
8
20
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
During 2014 the perception
of insolvency risk implicit in
government securities yields
and CDS prices has
significantly improved for
Italy, Spain and Greece. In
particular, investors’ risk
perception has become
lower than Moody’s official
rating. In 2014 the
rocketing trend of the
investors’ confidence in the
Irish public bonds further
heightened, due to the
positive macroeconomic
outlook and the ongoing
fiscal consolidation, coupled
with Ireland’s return to
capital markets. To note the
peculiar situation of the
Spanish fixed income
segment as the market
pricing of risk is
now perfectly aligned with
the official rating.
Figure 2.4 – Bond and CDS implied ratings in some euro area countries
(monthly data; January 2009 – September 2014)
Italy
France
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
2009
2010
2011
2012
2013
2009
2014
2010
2011
2012
2013
2014
2012
2013
2014
2012
2013
2014
Spain
Ireland
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
2009
2010
2011
2012
2013
2014
2009
Portugal
2010
2011
Greece
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
2009
2010
2011
2012
Moody's official rating
governative bonds implied rating
CDS implied rating
Source: calculations on Moody’s data.
2013
2014
2009
2010
2011
Risk Outlook
8
21
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In the first quarter of 2014,
foreign investors slightly
increased their exposures in
sovereign bonds of
peripheral euro area
countries, with the
exception of Spain.
Figure 2.5 – Non-resident holdings of general government debt
% changes
% of public debt
United Kingdom
United Kingdom
United States
United States
Spain
Spain
Italy
Italy
Portugal
Portugal
Germany
Germany
France
France
Ireland
Ireland
Q1 2014
2013
2012
0
10
20
30
40
50
60
70
-21
-10
-5
0
5
10
Source: calculations on data from Bruegel database of sovereign bond holdings developed in Merler and PisaniFerry (2012; www.bruegel.org) and IMF data (for Portugal). Q1 2014 figures are not available for US and Portugal.
In the first quarter of 2014,
ECB holdings of eurozone
public debt declined further
to 2.6%, whilst resident
banks’ holdings slightly rose
to 21.8%. The distribution
of government bonds
holdings between Central
and private banks continues
to be significantly heterogeneous across countries,
reflecting discrepancies in
the monetary policies
adopted by Central banks as
well as differences in the
structural features of
financial systems.
Sovereign refinancing needs
remain challenging in
countries with high stocks
of debt. In 2015, Italy will
refinance a maturing debt
equal to 18% of GDP. At
the same time, the
estimated deficit that will
be financed in 2015 is equal
to 2.4% of GDP.
Figure 2.6 – Central bank and private banks holdings of general government debt
banks holdings of public debt (% of public debt)
Central bank holdings of public debt (% of public debt)
30
30
ECB
FED
Euro Area
BOE
25
25
20
20
15
15
10
10
5
5
0
United States
United Kingdom
0
2010
2011
2012
2013
Q1 2014
2010
2011
2012
2013
Q1 2014
Source: Thomson Reuters and Bruegel database of sovereign bond holdings developed in Merler and Pisani-Ferry
(2012; www.bruegel.org). The data for euro area refer to private bank holdings of Greece, Ireland, Italy, France,
Germany, Spain and the Netherlands.
Figure 2.7 – The refinancing needs of general government debt
maturing debt and general government deficit (% of GDP)
maturing debt (% of total debt)
20
long-term
25
short-term
maturing debt
deficit
20
15
15
10
10
5
5
0
0
2014
2015
Italy
2014
2015
Germany
2014
2015
France
2014
2014
2015
2015
Italy
Spain
-5
Source: calculations on Thomson Reuters Eikon and EU Commission data.
2014
2015
Germany
2014
2015
France
2014
2015
Spain
Risk Outlook
8
22
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Figure 2.8 – General government debt components
Italy
2015
2014
2010
2012
2008
2006
2004
2002
2000
1998
0
40
-5
20
-10
0
0
20
-4
0
primary deficit
snow-ball effect
stock-flow adjustment
2015
60
40
2013
5
4
2011
80
60
2009
10
8
2007
100
80
2005
15
12
2003
120
2001
100 20
1999
1994
1992
1996
Spain
France
1997
16
2011
0
0
2013
-15
-10
2007
25
2009
-10
2005
50
20
2001
-5
-5
2003
75
40
1999
0
0
1997
100
60
1995
5
5
1991
125
80
1993
10
10
1989
150
1987
100 15
1985
Germany
1995
15
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
The path of debt-to-GDP
ratio and the contribution
of its components are due
to differ across the major
euro are countries for a
long time. In 2015 the
Italian public debt is
expected to exceed 134%
of GDP. France is forecast
to reach almost 97%, Spain
should rise around 104%.
The primary deficit is the
key driver for France and
Spain, whilst Italy keeps
being penalized by the stock
of debt and the gap
between the growth rate
and the interest rate.
debt/GDP - right scale
Source: EU Commission. The snow-ball effect measures the increase in public debt to GDP determined by the
difference between interest rate and GDP growth rate; the stock-flow adjustment is the difference between the
change in government debt and the government deficit/surplus for a given period.
Figure 2.9 – Primary balance required to lower the debt-to-GDP ratio in order to comply with
the Fiscal Compact Treaty in some euro area countries
primary balance required to lower debt-to-GDP ratio
gross debt-to-GDP ratio according to Fiscal Compact
150
6
baseline scenario
positive scenario
negative scenario
historical primary balance
primary balance 2014
140
130
4
120
110
2
100
90
0
80
70
60
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
The public finance adjustments required by the Fiscal
Compact are substantial for
both peripheral and core
countries. As for Italy, in
the baseline scenario (i.e.
GDP growth equal to 0.85%
and interest rate equal to
2.2%), fulfilling the Fiscal
Compact requirements
would imply a primary
surplus equal to 4% of GDP
(2 times higher than its
historical value), while
France should record a
primary balance of 0.7% (if
GDP growth were equal to
0.95% and interest rate
were equal to 0.5%),
against a historical average
equal to -1.2%.
-2
-4
Italy
France
Spain
Germany
Italy
France
Spain
Germany
In the baseline scenario interest rates and GDP growth rates are equal to those forecast for 2015 (i.e., GDP
growth rate equal to 0.85% for Italy, 1.45% for Germany, 0.95% for France and 1.68% for Spain; and real
interest rates equal to 2.2% for Italy, -0.3% for Germany, 0.5% for France and 1.8% for Spain). In the positive
scenario, interest rates are equal to those forecast for 2015 and GDP growth rates are equal to those forecast for
2015 plus 1%. In the negative scenario, interest rates are 1% higher than those forecast for 2015 and GDP
growth rates are equal to those forecast for 2015. In all scenarios the inflation rate is equal to that forecast for
2015. The source for all data is the IMF. Historical primary balance is the average of cyclically adjusted primary
balances from 1999 to 2013.
Risk Outlook
8
23
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
The GDP nowcasts for the
third quarter of 2014, based
on soft and hard indicators
of economic health, confirm
that the real economy is
slowing down in Italy and
France, while Spain seems
to exhibit a good recovery
and Germany appears
stagnant.
Figure 2.10 – GDP nowcasts for some euro area countries
(percentage values)
Italy
Germany
3,0
3,0
2,0
2,0
1,0
1,0
0,0
0,0
-1,0
-1,0
-2,0
-2,0
-3,0
-3,0
-4,0
-4,0
-5,0
-5,0
-6,0
-6,0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Actual GDP
Estimated GDP
Upper bound
2006 2007 2008 2009 2010
2011
2012 2013 2014
Lower bound
France
Spain
3,0
3,0
2,0
2,0
1,0
1,0
0,0
0,0
-1,0
-1,0
-2,0
-2,0
-3,0
-3,0
-4,0
-4,0
2006
2007
2008
Actual GDP
2009
2010
2011
2012
Estimated GDP
2006
2013 2014
Upper bound
2007
2008
2009
2010
2011
2012
2013
2014
Lower bound
The methodology applied to construct the forecast is based on a small-size state space model, using 11 hard and
soft indicators (preliminary and final estimates of GDP; hard indicators: Exports, Industrial Production Index,
Retail Sales, Employment; soft indicators: Economic Sentiment Indicator, Business Confidence Indicator,
Consumer Confidence Indicator, Building Confidence Indicator) adapted from Camacho and Perez-Quiros (2010);
the Kalman filter methodology is used to extract a common factor. The model is estimated separately for each
country (Italy, Germany, France, Spain). Calculations are based on data from EU Commission, Istat, Insee,
Bundesbank, Ine. The sample used to construct the forecast ranges from June 2002 to January 2014.
In 2014, US corporate bond
yields experienced a fall
only in the non-financial
sector, whereas remained
substantially stable in the
bank sector.
In Europe, yields dropped
for all corporate securities,
albeit the decrease was
more pronounced for nonfinancial sector. The spread
between non-investment
grade and higher rated
bonds held stable.
Figure 2.11 – Bank and non financial bond yields
(percentage values; daily data; 01/06/2010 - 30/09/2014)
non-financial
bank
14%
14%
12%
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
2010
2011
2012
2013
2014
US bonds rated >BBB
US bonds rated BBB
European bonds rated >BBB
European bonds rated BBB
0%
2010
Source: Thomson Reuters Eikon. Data refer to Markit Iboxx indices.
2011
2012
2013
2014
Risk Outlook
8
24
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In the first half of 2014,
the primary market of nonfinancial corporate bonds
showed signs of a slowdown
both in the US and in
Europe compared to the
first half of 2013.
On the contrary, in Italy net
issuance volumes in the first
half of 2014 were 4 times
higher than those recorded
in the same period of 2013.
This development probably
signals the rising propensity
of corporations to turn to
debt capital markets, in the
wake of the enduring shrink
in the availability of bank
lending.
The volume of securities
maturing in the second half
of 2014 is roughly equal to
50 billion euros in the
United States, 65 billion in
Europe and 3.7 billion in
Italy (respectively 1.6%,
3.4% and 2.3% of gross
issuances since 2007), thus
positing a limited the
refinancing risk.
Figure 2.12 – Non-financial corporate bonds issues and maturities
(billions of euro)
USA
issuances and redemptions for institutional investors
maturities (in % of total issuances)
600
300
400
250
(8.7%)
(8.4%) (8.1%) (8.0%)
(6.1%)
200
200
(5.5%)
150
0
100
-200
(1.6%)
50
0
-400
2007
2008
2009
2010
2011
2012
H2 2014 2015
2013 H1 2014
2016
2017
2018
2019
2020
EUROPE
400
210
300
175
200
140
100
105
0
70
-100
35
(9.4%)
(8.9%)
(8.1%)
(7.4%)
(7.1%)
(5.7%)
-200
2007
2008
2009
2010
2011
2012
(3.4%)
0
2013 H1 2014
H2 2014
2015
2016
2017
2018
2019
2020
ITALY
40
25
30
(13.6%) (14.3%)
20
(10.9%)
(10.3%)
20
15
(7.7%)
10
(7.8%)
10
0
5
-10
(2.3%)
0
-20
2007
2008
bonds >BBB
2009
2010
2011
bonds <BBB
2012
2013 H1 2014
commercial paper
H2 2014
net issues
2015
2016
2017
2018
2019
2020
H1 net issues
Source: calculations on Dealogic data. European issuance data refer to companies with registered office in Italy,
France, Germany, Spain, the Netherlands and the UK and their subsidiaries (even those established in other
countries).
Risk Outlook
8
25
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In the first half of 2014,
bank bond issuance activity
was stagnant in the US,
with net volumes slightly
negative. Over the same
period, the European market
showed feeble signs of
recovery, although net
issuances remained
negative. In Italy, credit
institutions increased their
recourse to debt markets,
with net issuances rising
by18.5% compared to the
first half of 2013, mainly as
a consequence of an
increase in the demand of
institutional investors. In
the second half of 2014,
the refinancing needs
appears to be higher in
Europe (around 5% of the
total issued in 2007) than
in the US (equal to about
2%). In Italy, the maturing
bonds account for 5.8% of
the total amount issued
since 2007.
Figure 2.13 – Bank bonds issues and maturities
(billions of euro)
USA
issuances and redemptions for institutional investors
maturities (in % of total issuances)
400
140
300
120
200
100
100
80
0
60
-100
40
(10.9%)
(6.8%)
(6.3%)
(5.3%)
(4.9%)
(2.7%)
(1.9%)
-200
20
-300
2007
2008
2009
2010
2011
2012
2013 H1 2014
0
H2 2014
2015
2016
2017
2018
2019
(3.9%)
(3.7%)
2020
EUROPE
900
450
600
400
300
350
(8.3%)
(7.8%)
300
0
(6.5%)
250
-300
200
-600
(4.2%)
150
-900
100
-1,200
50
(2.7%)
0
-1,500
2007
2008
2009
2010
2011
public guaranteed securities
2012
bonds
H2 2014
2013 H1 2014
commercial paper
2015
2016
covered bond
2017
net issues
2018
2019
2020
H1 net issues
ITALY
maturities (in % of total issuances)
gross issuances
250
60%
200
30%
180
(10.8%)
150
(9.4%)
120
150
0%
(7.0%)
90
100
(5.8%)
-30%
(4.4%)
60
50
-60%
-90%
0
2007
2008
2009
domestic retail
2010
2011
2012
wholesale
2013
H1
2014
(3.4%)
(2.0%)
30
0
H2
2014
2015
2016
2017
2018
2019
2020
% - right scale
Source: calculations on Dealogic data. European issuance data refer to companies with registered office in Italy,
France, Germany, Spain, the Netherlands and the UK and their subsidiaries (even those established in other
countries). Gross issuance change for H1 2014 is computed relative to H1 2013.
Risk Outlook
8
26
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In the first half of 2014,
the volume of
mortgages-backed
securities issued by
American and European
banks declined. Over the
same period, the activity in
the Italian market showed a
slight recovery.
Primary markets for other
securitized assets remained
stagnant in US, whist
showing signs of a reversal
recovery in Europe. In Italy,
the net issuances of
asset-backed securities
continued to be negative.
Figure 2.14 – Securitisation issuances
(billions of euro)
USA
mortgage loans
others
700
1,250
600
1,000
500
750
400
500
300
250
200
0
100
-250
0
-500
-100
-750
-200
-1,000
2007
2008
2009
private entities
2010
2011
2012
2013 H1 2014
agencies and public entities
2007
net issues
2008
2009
2010
2011
2012
2013 H1 2014
H1 net issues
EUROPE EX ITALY
others
mortgage loans
400
180
350
150
300
120
250
90
200
60
150
30
100
50
0
0
-30
-50
2007
2008
2009
2010
2011
2012
2013 H1 2014
-60
2007
2008
2009
2010
2011
2012
2013 H1 2014
2008
2009
2010
2011
2012
2013 H1 2014
ITALY
60
20
50
15
40
10
30
5
20
0
10
-5
0
-10
-15
-10
2007
2008
2009
sold in the market
2010
2011
2012
2013 H1 2014
retained by the originator
net issues
2007
H1 net issues
Source: calculations on Dealogic data. The data for Europe refer to asset-backed securities of companies with
registered office in Italy, France, Germany, Spain, the Netherlands and the UK and their subsidiaries.
Risk Outlook
8
27
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Non-financial companies
Until the first six months of 2014, the market capitalization of the main European companies
continued to rise in line with the leading European stock index. Since June, this trend has slowed
down or reversed in the wake of the newly mounting uncertainty about the Eurozone economic
perspectives (Fig 3.1). In the first half of 2014, large Italian companies’ profitability remained flat,
after the increase experienced the previous year, and in line with the UK peers (Fig 3.2). French and
Spanish groups exhibited on average the most significant improvements in terms of Ebit margin,
whilst German figures keep being more subdued. As for the financial structure, only Italian companies
showed a further reduction in the short term debt ratio (at 18.6%, in line with the UK, much lower
than French and German averages). Moreover, large Italian and Spanish firms remained the most
leveraged, with an equity base well below their European peers; however, at mid-year around 60% of
UK and German companies also had a ratio higher than the 10-year average, in line with the figure
for Italy (Fig 3.3). Consistently with their poorer capitalization, Spanish and Italian groups displayed
the lowest, albeit stable, interest expense coverage ratio, which was below the 10-year average in
about 67% and 80% of the cases, respectively. UK firms boasted the best (but declining) coverage,
while France and Germany had the lowest percentage of companies below the long term average. At
the end of June 2014, liquidity ratios were little changed only for large French non-financial
companies with respect to the values at the end of the previous year, deteriorating significantly for
UK and German firms and, to a lesser extent, for Italian and Spanish groups (Fig 3.4). As for the
payout of debt, Italian and German companies exhibited the lowest ratios, while UK and French
groups boasted the richest cash flows from their core operations. Turning to the main vulnerabilities,
in the first half of 2014 the percentage of non-financial groups showing a turnover below the 10-year
average was greater than 80% across all the main European countries (Fig 3.5). Italy showed the
highest percentage (close to 90%), stable with respect to the previous year, along with France,
experiencing a significant growth. Italy still displays the highest percentage of loss-making
companies. The vulnerability indicators on the financial structure point to a substantial stability in
terms of leverage and interest coverage relative to the 10-year averages for the main European
groups, apart from France showing an improvement (Fig 3.6). On the other hand, the mix of liquidity
conditions and debt payout has worsened, except for UK and Spanish groups. Firms in the peripheral
countries are still penalized by discrepancies in bank loan rates, which although decreasing are
persistent and mirror a gap in the functioning of the monetary policy transmission mechanism across
the euro area (Fig 3.7 and Fig 3.8). Moreover, Italy and Spain have suffered a much more severe
contraction in bank lending than France and Germany, although with slight signs of recovery in the
first half of 2014. During the first half of 2014, signals of an easing of corporate credit risk perception
have emerged, with both observed CDS quotes and their EDF implied values declining to new lows,
especially for Italian companies (Fig 3.9). Positive developments in the perceived risk of European
companies are also found in the changes recorded by the official and market prices implied ratings: in
particular, at the end of September stock, bond and CDS implied ratings across Europe were on
average higher than at the beginning of the year (Fig 3.10).
Risk Outlook
8
28
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Until the first half of 2014,
the market capitalization of
the main European
companies continued to rise
in line with the leading
European stock index. Since
June, this trend has slowed
down or reversed following
the increased uncertainty
about the Eurozone
economic perspectives.
Figure 3.1 – Relative size of large cyclical and defensive sector non-financial listed companies
150
market value of major non-financial companies and equity index
(monthly data; January 2007-September 2014; January 2007=100)
1,600
market value as of September 2014 by sectors
(amounts in billions of euro and percentage of the sample)
37.3%
1,400
125
1,200
1,000
100
31.3%
800
75
50
200
25
85.5%
68.7%
600
400
2007
2008
2009
Italy
Spain
2010
2011
2012
2013
France
United Kingdom
2014
62.7%
14.5%
29.2%
34.9%
65.1%
70.8%
0
Italy
Germany
StoxxEurope50
France
cyclical
Germany
Spain
United
Kingdom
defensive
Source: calculations on Thomson Reuters Datastream data on the top 30 non-financial companies by
capitalisation as of September 2014 for France, Germany, Spain and the UK, and on major Italian listed groups.
Cyclical sectors include: basic materials, energy, chemicals, aerospace, automobiles and components, personal
and household products, media, distribution, travel and leisure, telecommunications, transport, construction,
industrial machinery; belong to these sectors 23 listed companies in France, 23 in Germany, 22 in Spain, 18 in the
UK and 22 in Italy. Defensive sectors include: food (and drinks), tobacco, pharmaceuticals, health, utilities; belong
to these sectors 7 companies listed in France, 7 in Germany, 8 in Spain, 12 in the UK and 7 in Italy.
In the first half of 2014,
large Italian companies’
profitability remained flat,
after the increase
experienced the previous
year, and in line with the
UK peers. As for financial
structure, at mid-year UK
and French firms showed
the lowest levels of
leverage, followed by
German companies. Spanish
firms have kept reducing
the debt/equity ratio,
contrary to Italian and
German companies.
Figure 3.2 – Profitability and financial structure of major European non-financial listed
companies
short-term debt / total debt
Ebit margin (Ebit / net revenues)
50%
21%
18%
40%
15%
30%
12%
20%
9%
6%
10%
3%
2007
2008
Italy
2009
France
2010
2011
Germany
2012
2013
Spain
H1
2014
0%
2007
2008
2009
2010
2011
2012
2013
H1
2014
United Kingdom
Source: calculations on Worldscope data on the top 30 non-financial companies by capitalisation as of
September 2014 for France, Germany, Spain and the UK, and on major Italian listed groups. The figures for the
first half of 2014 are annualised and partly estimated.
Risk Outlook
8
29
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Although Italian and
Spanish non-financial
groups remain by far the
most leveraged, as of June
2014 around 60% of UK
and German companies had
a ratio higher than the 10year average, in line with
Italy. As for interest
expense, Spain and Italy
displayed the lowest, albeit
stable, coverage ratios. UK
firms boasted the best (but
declining) coverage, while
France and Germany had
the lowest percentage of
companies below the long
term average.
Italian and German
companies displayed the
lowest payout ratio, while
UK groups boast the richest
cash flows from core
operations. Italy has also
the highest percentage of
firms with a debt payout
ratio below the 10-year
average. At the end of June,
liquidity ratios were little
changed for large French
non-financial companies,
while significantly worsened
for other European groups.
Italy and the UK exhibit the
highest coverage ratio for
short-term debt.
Figure 3.3 – Interest expenses coverage and leverage of major European non-financial listed
companies
(amounts in billions of euro)
leverage H1 2014 (total debt / total equity)
interest coverage ratio (EBIT / interest expenses)
1,200
180%
1,000
150%
800
120%
600
90%
400
60%
200
0
Italy
France
Germany
Spain
15
100%
12
80%
9
60%
6
40%
30%
3
20%
0%
0
United
Kingdom
0%
Italy
France
Germany
Spain
United
Kingdom
total equity
total debt
2011
leverage - right scale
companies with leverage > 10-year average - right scale
companies with ratio at the first half of 2014 < 10-year
average - right scale
2012
2013
H1 2014
Source: calculations on Worldscope data on the top 30 non-financial companies by capitalisation as of
September 2014 for France, Germany, Spain and the UK, and on major Italian listed groups. The figures for the
first half of 2014 are annualised and partly estimated.
Figure 3.4 – Payout of debt and coverage of short-term debt of major European nonfinancial listed companies
(amounts in billions of euro)
payout of debt H1 2014 and its components
cash & short-term investments / short-term debt
360
60%
240
40%
120
20%
0%
0
-120
Italy
France
Germany
Spain
United
Kingdom
-20%
cash flow from operating activities
capital expenditures (capex)
net financial debt
payout of debt - right scale
companies with payout debt < 10-year average - right scale
200%
100%
160%
80%
120%
60%
80%
40%
40%
20%
0%
0%
Italy
2011
France
2012
Germany
2013
Spain
United
Kingdom
H1 2014
companies with ratio at the first half of 2014 <
10-year average - right scale
Source: calculations on Worldscope data on the top 30 non-financial companies by capitalisation as of
September 2014 for France, Germany, Spain and the UK, and on major Italian listed groups. The figures for the
first half of 2014 are annualised and partly estimated.
Risk Outlook
8
30
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In the first half of 2014,
despite the improvement in
average profitability, Italy
still exhibited the highest
percentage of loss-making
companies. The percentage
of non-financial groups
showing a turnover below
the 10-year average was
greater than 80% across all
the main European
countries Over the same
period, Italian firms
recorded an improvement in
short term debt incidence.
Figure 3.5 – Profit vulnerability of major European non-financial listed companies
Considering the financial
structure, the vulnerability
indicators for European
groups look stable in terms
of leverage and interest
coverage relative to their
10-year average, apart from
France. On the other hand,
the mix of liquidity
conditions and debt payout
has worsened, except for UK
and Spanish groups.
Figure 3.6 – Financial structure vulnerability of major European non-financial listed
companies
(number of companies in percentage of the sample at the first half of 2014)
100%
70%
60%
80%
50%
60%
40%
30%
40%
20%
20%
10%
0%
0%
Italy
France
Germany
Spain
United
Kingdom
Italy
France
Germany
Spain
United
Kingdom
annual change in net turnover < 10-year average
incidence of short-term debt > 10-year average
net loss
negative EBIT
values at the first half of 2013
values at the first half of 2013
Source: calculations on Worldscope annualised data on the top 30 non-financial companies by capitalisation as
of September 2014 for France, Germany, Spain and the UK, and on major Italian listed groups.
(number of companies in percentage of the sample at the first half of 2014)
50%
25%
40%
20%
30%
15%
20%
10%
10%
5%
0%
Italy
France
Germany
Spain
United
Kingdom
0%
Italy
France
Germany
Spain
companies with coverage of interest expense lower
and leverage higher than the 10-year average
companies with payout of debt < 10% and
coverage of short-term debt ratio < 100%
values at the first half of 2013
values at the first half of 2013
United
Kingdom
Source: calculations on Worldscope annualised data on the top 30 non-financial companies by capitalisation as
of September 2014 for France, Germany, Spain and the UK, and on major Italian listed groups.
Figure 3.7 – Trends in bank lending to non-financial companies and expected default
frequencies
(percentage values)
100
tightening in lending conditions
6
interest rate on bank loans
Since the end of 2011,
although decreasing,
discrepancies in bank loan
rates among peripheral and
core countries’ firms are
persistent, mirroring a gap
in the functioning of the
monetary policy
transmission mechanism
across the euro area.
Moreover,
Italy and Spain have
suffered a much more
severe contraction in bank
lending than France and
Germany, although with
slight signs of easing in the
first half of 2014.
Spain
5
Italy
4
Germany
France
3
75
Italy
50
France
25
Spain
Germany
0
-25
2
0
1
2
-12
3
-8
expected default frequency
Dec-2011
Dec-2013
-4
0
lending growth
4
8
Jun-2014
Source: ECB and Moody’s Credit Edge data. Tightening in lending conditions is the net percentage of banks
reporting a tightening in credit standards (for Italy, Germany and Spain) and the net percentage of banks
reporting a tightening in credit standards weighted for the share of each bank in the total loan outstanding
amount in the sample (for France). Lending growth is the annual growth rate of bank loans to non-financial
th
th
th
companies. Corporate EDF (one year) are the average of the 25 , 50 and 75 percentiles; the sample comprises
publicly traded firms.
Risk Outlook
8
31
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
During 2014, the decline in
peripheral countries’
sovereign spreads was not
reflected in the pattern of
the bank interest rates for
large and small size loans of
Italian and Spanish firms. To
this respect, their
competitive position relative
to their European peers
remain severely affected.
Figure 3.8 – Banking interest rates on euro loans to non-financial corporations
(monthly data; January 2009 – July 2014)
over 1 million euro
until 1 million euro
6%
6%
5%
5%
4%
4%
3%
3%
2%
1%
0%
2009
Germany
Spain
France
Italy
2010
2011
2%
1%
2012
2013
2014
0%
2009
2010
2011
2012
2013
2014
Source: ECB; interest rates on new loans.
In the first nine months of
2014, both observed CDS
quotes and their values
implied by EDF for European
companies declined to new
lows (at around 70 basis
points), signaling an easing
of corporate credit risk
perception. The fall was
sharper for Italian
companies (from 230 to
150 bps).
Figure 3.9 – Prices of 5-year CDS observed and implied by the expected default frequencies
(EDF)
(basis point; daily data; 31/01/2008 – 30/09/2014)
Euro area - ex Italy
Italy
750
750
median observed values
median values implied by the EDF
600
600
450
450
300
300
150
150
0
2008
2009
2010
2011
2012
2013
2014
0
2008
2009
2010
2011
2012
2013
2014
Source: calculations on Thomson Reuters Datastream and KMV - Credit Edge data. The sample includes 68 listed
firms in the euro area, which belong to Thomson Reuters corporate CDS indexes and under Moody’s rating and of
7 Italian non-financial listed firms.
Since the beginning of the
year, official ratings for
large European companies
have slightly improved
(stabilizing at just below A3
on average), whilst those
for Italian firms remained
flat above Baa3, i.e. two
notches lower. Stock, bond
and CDS implied ratings
across Europe were also
higher on average than at
the beginning of the year.
Figure 3.10 – Rating implied by financial instruments prices
(monthly data; January 2007 - September 2014)
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Italy
Euro area - ex Italy
2007
2008
2009
2010
Moody's official rating
rating implied by CDS prices
2011
2012
2013
2014
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
2007
2008
2009
2010
2011
2012
2013
2014
rating implied by bond spreads
rating implied by stock returns
Source: calculations on Moody’s Implied Rating data. We report the average values, referring to corporate firms
included in the Euro Stoxx 50 index for the euro area (excluded non-financial Italian firms) and the Italian nonfinancial companies included in the FTSE Mib.
Risk Outlook
8
32
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Banks
In the first half of 2014, profitability relative to risk weighted assets (RWAs) of the major European
banks rose after the steep drop recorded in 2013, when pre-emptive balance-sheet cleanup and derisking measures were undertaken ahead of AQR and EU-wide stress test (Fig 4.1). In the same time
period, with the exception of France, gross income lowered driven by the decline in trading profits
(Figg. 4.2 and 4.3). As for capital adequacy, in the first semester of 2014, following the phase in of the
new transitional national rules enacting the CRD IV-CRR package (in force since the 1st of January),
the tier 1 ratio dropped for all major European banks (2014 capital adequacy coefficients, however,
are not directly comparable with the previous figures; Fig 4.4). The only exception were Italian banks,
which in 2014 undertook a heavy recapitalization via equity issuance (Fig 4.5). Italian and Spanish
banks continued to exhibit a higher ratio of RWAs to total assets compared to their European peers,
mirroring differences in business models and balance-sheet structure. Consistently, holdings of
financial assets and derivatives keep being significantly lower for Italian and Spanish institutions (Fig
4.6). In the first half of 2014, the quality of loan portfolios of Italian and Spanish banks, as measured
by the rate of change in bad loans, recorded a slight improvement for the first time since 2011(Fig
4.7). Nonetheless, in Italy the weight of bad loans on total gross loans continued to rise, due to the
contraction of total loans. In the same time period, the cost of risk declined back to 2011 level, after
the peak recorded in 2013. As for bank lending, in the second quarter of 2014, credit conditions to
households and firms eased for the first time since 2007 (Fig 4.9). However, in the first months of
2014 bank loans to non-financial corporations fell further in Italy and Spain (respectively, by 5% and
10%) (Fig 4.10). Moreover, except for Germany, the demand for bank loans remained weak, due to
persistently low business confidence (Fig 4.11). In 2014, also bank lending for house purchase
continued to record negative growth rates, due to weak activity in property markets putting
downward pressure on the price-to-rent ratio (Fig 4.12). In early 2014, the sovereign-bank nexus, as
measured by the exposure to domestic sovereign bonds, rose in Spain, while remaining stable in Italy
and Germany (Fig 4.13). Financial fragmentation, as measured by total banks’ foreign claims, fell
during the first months of 2014 in all the largest euro area countries (Fig 4.14, Fig. 4.15 and Fig 4.16).
The decrease of Target 2 imbalances confirms this trend, with the peripheral countries (i.e. Italy and
Spain) improving their debtor position. Such developments were driven by the introduction of a
negative interest rate on ECB deposit facilities, which prompted an increase in capital flows towards
those countries formerly perceived as more vulnerable (Fig 4.17). However, Italy’s international
investment position continued to be negative (by 500 billions of euro at the end of July), mainly
because of valuation effects. Indeed, the decline in the sovereign spreads and the increase in share
prices resulted in a higher market value of the Italian securities held by non-residents. Recourse to
ECB funding fell for Italian and Spanish banks at 4.5% and 6% of total assets, respectively, as a
consequence of the early repayments of ECB funds allotted in December 2011 and February 2012
during the 3-years LTRO (Fig 4.18). The exposures of Italian banks to emerging markets is lower than
1% of total assets, while Spanish and English banks are the most exposed (about 5% and 3,5%
respectively; Fig 4.19). During 2014, the perceived credit risk of European financial institutions kept
declining, as shown by the trends in both the observed values of CDS and those implied by the EDF.
Italian banks continued to be perceived riskier than their European peers, although the relative gap is
narrowing (Fig 4.23). The improvement in European banks’ risk perception is signaled also by the
ratings implied in bond spreads and CDS prices recorded at the end of September. This phenomenon is
more marked for Italian banks, whose implied bond and CDS ratings reached levels higher than the
official rating (Fig 4.24).
Risk Outlook
8
33
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In 2013, the balance-sheet
cleanup and the de-risking
measures undertaken ahead
of AQR and EU-wide stress
test drive the profitability
levels of major European
banks downward, with the
notable exception of Spain.
In Italy, profits relative to
RWAs suffered a steep drop
in 2013, followed by a
recovery in the first half of
2014 mainly due to a
decline in RWAs.
In the first half of 2014,
the major Italian banks
experienced a reduction of
the gross income, due to the
decline in trading profits
that was not offset by the
slight increase in net
interests margin and in net
commissions. In the same
time period, the main
European banks have shown
a fall in gross income and
costs, with the exception of
France.
The largest Italian banking
groups showed a strong
reduction of profits from
trading activities in H1
2014. Net income, however,
exhibited a significant
increase compared to the
same period of 2013. This
dynamics derived from the
rise of net interest margin
and net commissions and
the decline of net
provisions. Capital adequacy
ratio rose for almost all
banking groups.
Figure 4.1 – Profitability of the main listed European banks
(profit before taxes / risk-weighted assets)
3,0%
3,0%
2010
2012
2011
2013
2,0%
2,0%
1,0%
1,0%
0,0%
0,0%
-1,0%
-1,0%
-2,0%
Jun 2013 (A)
Jun 2014 (A)
-2,0%
Italy
Germany
France
Spain
United
Kingdom
Italy
Germany
France
Spain
United
Kingdom
Source: calculations on data from consolidated annual reports of the main listed European banks (24 groups). The
profit before taxes is calculated excluding goodwill impairment. The figures as at June 30 are annualised and
partly estimated.
Figure 4.2 – Change in revenues and costs of the main listed European banks
(change H1 2013 / H1 2014)
net interest margin
Italy
operating expenses
gross income
Italy
net fees
trading income
Germany
Germany
France
France
Spain
Spain
United
Kingdom
United
Kingdom
-60%
-40%
-20%
0%
20%
40%
-12%
60%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Source: calculations on data from consolidated annual and interim reports of the main listed European banks (24
groups). The figures as at 30 June are annualised and partly estimated. ROE is calculated on total equity at the
end of period.
Figure 4.3 – Income and solvency ratios of major Italian banking groups
change H1 2014 / H1 2013
solvency ratios
net interest margin
other revenues
net trading profits
-35.5
net revenues
-1.8
operating costs
-1.6
operating profits
-2.1
net provisions
Tier 1 capital ratio
1.9
19%
2.05 net commissions
17%
Total capital ratio
15%
13%
other assets
11%
loans
-6.48
9%
net income
7%
-75% -60% -45% -30% -15%
0%
15%
30%
45%
2013
H1 2014
2013
H1 2014
Source: calculations on data from consolidated annual reports. Data refer to the 8 largest banking groups by total
assets. The retrospective application of IFRS 10 “Consolidated Financial Statements” and IFRS 11 “Joint
st
Arrangements” back to the 1 of January 2013 caused a change in the consolidation scope. Figures as of
December 2013 and June 2014 are not fully comparables to previous figures.
Risk Outlook
8
34
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Since 2011, European banks
have been raising new
equity capital by about 70
billion euros. In 2014,
Italian banks are the largest
equity issuers, ahead of the
AQR and stress test. The
recapitalization was
reflected into market trends,
with an increase in share
prices and multiples.
Figure 4.4 – Capital adequacy and leverage of the main listed European banks
H1 2014
2013
40
40
Germany
30
30
France
leverage
leverage
In 2013, capital ratios
improved for Spanish and
German banks, while
remained almost stable in
Italy, France and the UK.
In the first semester of
2014, following the
implementation of the CRD
IV-CRR package (in force
since the 1st of January), the
phase in of the new
national rules led to a drop
in the tier 1 ratio for all
major European banks, with
the exception of Italy.
Spain
20
United
Kingdom
Italy
10
Germany
France
20
Spain
United
Kingdom
10
Italy
0
0
9%
10%
11%
12% 13%
tier 1 ratio
14%
15%
16%
31-Dec-2012
10%
31-Dec-2013
11%
12%
13%
14%
tier 1 ratio
15%
16%
30-Jun-2014
Source: calculations on data from consolidated annual and interim reports of the main listed European banks (24
groups). The figures as at 30 June are partly estimated. Figures as of December 2013 and June 2014 are not fully
comparables to previous figures as a result of both the retrospective application of IFRS 10 “Consolidated
st
Financial Statements” and IFRS 11 “Joint Arrangements” back to the 1 of January 2013, that caused a change in
the consolidation scope, and the phase in of Basel III framework.
Figure 4.5 – Right issues and market value of listed banks of main euro area countries
rights issues (public support since 2008)
price to book value (market value increase since 2011)
80
8 0
70
7 0
60
1,4
1,2
6 0
1
50
5 0
0,8
40
4 0
0,6
30
3 0
20
2 0
10
1 0
0
0
Italy
Germany
2011
2012
2013
France
2014
0,4
0,2
0
Spain
Italy
Germany
France
Spain
public support since 2008
Source: calculations on data from ECB, Thomson Reuters and MBRES.
Italian and Spanish banks
continued to exhibit a
higher ratio of RWAs to
total assets compared to
their European peers,
mirroring differences in
business models and
balance-sheet structure.
Consistently, holdings of
financial assets and
derivatives are significantly
lower for Italian and
Spanish institutions.
Figure 4.6 – Financial assets and derivatives of the main listed European banks
(figures as of H1 2014)
50%
financial assets as % of total assets
(outstanding amount , EUR billions )
40%
1.500
1.000
(1.907)
3 0 ,0 %
(16%)
2 5 ,0 %
(13%)
(571)
30%
derivatives - outstanding aumount , EUR billions
(as % of total assets)
(24%)
500
(422)
(519)
20%
(1.152)
2 0 ,0 %
(6%)
(6%)
0
1 5 ,0 %
-500
10%
1 0 ,0 %
-1.000
0%
Italy
Germany
France
Spain
-10%
held for trading and designated at fair value
available for sale
held to maturity
derivatives (net fair value)
RWA/total assets
United
Kingdom
5 ,0 %
-1.500
0 ,0 %
United
Kingdom
France
Germany
Spain
Italy
positive fair value
negative fair value
Source: calculations on data from consolidated annual reports of the main listed European banks (24 groups).
Risk Outlook
8
35
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In the first half of 2014,
the quality of loan
portfolios of Italian and
Spanish banks, as measured
by the rate of change in bad
loans, has recorded a slight
improvement for the first
time since 2011.
Nonetheless, in Italy the
weight of bad loans on total
gross loans continued to
rise, due to the contraction
of total loans. In the same
time period, the cost of risk
declined back to 2011 level,
after the peak recorded in
2013.
Figure 4.7 – Credit quality of the main listed European banks
bad loans / total gross loans
change in bad loans
12%
20%
H1 2014
15%
2011
2012
2013
h1 2014
10%
2013
10%
8%
5%
6%
0%
-5%
4%
-10%
2%
-15%
-20%
0%
France
Italy
Spain
Germany
Italy
United
Kingdom
loan loss provision for the period / net loans
Germany
France
Spain
United
Kingdom
bad loans coverage in H1 2014
(total provisions for loan losses /non-performing loans)
4,0%
80%
2011
2012
2013
h1 2014
3,0%
60%
2,0%
40%
1,0%
20%
0,0%
Italy
Germany
France
Spain
0%
United
Kingdom
Italy
Germany
France
Spain
United
Kingdom
Source: calculations on data from consolidated annual reports of the main listed European banks (24 groups) The
increase in non-performing loans of Spanish banks compared to 2011 reflects also the consolidation of Banca
Civica by Caixa Bank in 2012. The figures are partly estimated. The retrospective application of IFRS 10
st
“Consolidated Financial Statements” and IFRS 11 “Joint Arrangements” back to the 1 of January 2013 caused a
change in the consolidation scope. Figures as of December 2013 and June 2014 are not fully comparables to
previous figures.
Since 2007, for the main
Italian banking groups
almost all classes of
doubtful loans have
continued to increase both
in gross and net terms. The
coverage ratio has remained
substantially stable, with
the exception of a slight
increase for past due loans.
Figure 4.8 – Credit quality of major Italian banking groups
doubtful loans coverage ratio
doubtful loans
250
5%
7%
200
5%
5%
150
7%
9%
31%
29%
27%
31%
100
33%
57%
57%
27%
23%
52%
68%
6%
32%
11%
9%
7%
50
6%
5%
58%
55%
bad loans
2009
substandard
60%
50%
50%
40%
40%
30%
30%
10%
10%
63%
2008
70%
60%
20%
20%
55%
0
2007
80%
70%
2010
2011
2012
restructured
2013
past due
H1
2014
0%
0%
2007
2008
2009
2010
2011
2012
2013
H1
2014
net loans
Source: calculations on data from consolidated annual reports of the 8 largest Italian banking groups. The
st
retrospective application since the 1 January 2013 of IFRS 10 “Consolidated Financial Statements” and IFRS 11
“Joint Arrangements” caused a change in the consolidation scope. Figures as of December 2013 and June 2014
are not fully comparables to previous figures.
Risk Outlook
8
36
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Since mid 2012, in the euro
area credit standards for
bank loans to households
and firms have continued to
ease. In particular, in the
second quarter of 2014, the
net percentage of banks
reporting a tightening in
credit conditions became
negative for the first time
since 2007.
Figure 4.9 – Credit standard indicators for bank loans in the euro area
(quarterly data; 1Q 2007 – 2Q 2014)
enterprises
households
70%
70%
residential mortgages
60%
small and medium-sized
60%
consumer credit
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
-10%
large
-10%
2007
2008
2009
2010
2011
2012
2013 2014
2007
2008
2009
2010
2011
2012
2013 2014
Source: ECB. Net percentage of banks reporting a tightening in credit standards.
In the first months of 2014,
bank loans to non-financial
corporations fell further in
Italy and Spain
(respectively, by 5% and
10%).
Figure 4.10 – Credit conditions and bank lending to non-financial companies in the main
euro area countries
100%
credit standard indicators of supply of bank loans
(quarterly data; Q1 2007 - Q2 2014)
15%
75%
annual growth rate of banks loans
(monthly data; January 2009 - July 2014)
Germany
France
Spain
Italy
10%
50%
5%
25%
0%
0%
-25%
-5%
-50%
Germany
Italy
-75%
Spain
France
-10%
-15%
-100%
2007
2008
2009
2010
2011
2012
2009
2013 2014
2010
2011
2012
2013
2014
Source: ECB.
Business confidence
remained negative in the
main euro area countries,
except for Germany and the
demand for bank loans
stayed weak, with crosscountry disparities declining
in the second quarter of
2014.
Figure 4.11 – Business confidence and demand for bank loans from non-financial
corporations in the largest euro area countries
(quarterly data; 1Q 2007 – 2Q 2014)
business confidence
demand for bank loans
20%
100%
10%
75%
0%
50%
-10%
25%
-20%
0%
-30%
-25%
-50%
-40%
Germany
Italy
-50%
Spain
France
-75%
-100%
-60%
2007
2008
2009
2010
2011
2012
2013
2014
2007
2008
2009
2010
2011
2012
2013 2014
Source: ECB. The credit demand indicator is the net percentage of banks reporting an increase in loans demand
from firms. For France net percentages are weighted based on the amounts outstanding of loans of the individual
banks in the respective national samples.
Risk Outlook
8
37
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In 2014, also residential
mortgages continued to
record negative growth
rates, due to weak activity
in property markets putting
downward pressure on the
price to rent ratio
Figure 4.12 – House prices and residential mortgages in the main European countries
price-to-rent ratio (Jan 2000=100)
residential mortgages (annual growth rate)
200
30
175
25
150
20
125
15
100
10
2014
2013
2012
2011
2010
2009
2008
2007
2006
-5
2004
2013
2014
2011
2012
2010
2008
2009
0
2007
Spain
2006
Italy
2005
5
2004
France
2003
2001
0
2000
25
Germany
2002
50
2005
75
Source: calculations on Thomson Reuters, BIS and ECB data.
In early 2014, the
sovereign-bank nexus, as
measured by the exposure
to domestic sovereign
bonds, rose in Spain, while
remaining stable in Italy
and Germany
Figure 4.13 – Exposures of the main European banks to domestic sovereign debt of some
countries of euro area
15%
as % of total assets
billions of euro
600
Italy
GIP
France
500
12%
Spain
Germany
UK
400
9%
300
6%
200
3%
100
Italy
Germany
Spain
United
Kingdom
Italy
Germany
France
Mar-2014
2010
Spain
2013
Mar-2014
2010
2013
Mar-2014
2013
2010
Mar-2014
2013
2010
2013
Mar-2014
2010
2013
Mar-2014
2010
Mar-2014
2010
France
2013
Mar-2014
2013
2010
Mar-2014
2010
2013
Mar-2014
2010
0
2013
0%
United
Kingdom
Source: calculations on Bank for International Settlements and Bruegel data. Figures refer to total banking
system of Italy, Germany, France, Spain and the United Kingdom. The exposures to the country of origin are taken
from Bruegel database of sovereign bond holdings, by Merler and Pisani-Ferry (2012) and do not include loans.
Figure 4.14 – Cross-border exposures among banks of the largest European countries
4%
as % of total assets
350
billions of euro
Italy
GIP
France
300
3%
250
Spain
Germany
UK
200
2%
150
100
1%
50
Italy
Germany
France
Spain
United
Kingdom
Italy
Germany
Spain
Mar-2014
2013
2010
Mar-2014
2013
2010
2013
France
Mar-2014
2010
Mar-2014
2010
2013
Mar-2014
2010
2013
2013
Mar-2014
2010
Mar-2014
2010
2013
Mar-2014
2013
2010
Mar-2014
2010
2013
Mar-2014
0
2010
0%
2013
In the first quarter of 2014,
European banks either
raised or maintained stable
their cross-border exposures
with respect to end-2013
levels, thus reversing the
significant fall recorded
since 2010.
United
Kingdom
Source: calculations on Bank for International Settlements data. Figures refer to total banking system of Italy,
Germany, France, Spain and the United Kingdom and do not include exposures to the country of origin.
Risk Outlook
8
38
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
The same developments can
be observed with respect to
the foreign exposure of
Italian, German and French
banks to the private sector
of the other major European
countries.
Figure 4.15 – Foreign exposures of the main European banks to private sector of some
countries of euro area
as % of total assets
12%
Italy
GIP
France
10%
8%
billions of euro
500
Spain
Germany
UK
400
300
6%
200
4%
100
2%
Spain
Italy
Germany
Mar-2014
2010
Spain
2013
Mar-2014
2010
France
2013
Mar-2014
2010
2013
Mar-2014
2010
2013
Mar-2014
2010
United
Kingdom
2013
Mar-2014
2010
2013
Mar-2014
2010
France
2013
Mar-2014
2010
Germany
2013
Mar-2014
2010
Italy
2013
2013
Mar-2014
0
2010
0%
United
Kingdom
Source: calculations on Bank for International Settlements data. Figures refer to total banking system of Italy,
Germany, France, Spain and the United Kingdom and do not include exposures to the country of origin.
Overall, financial
fragmentation, as measured
by total banks’ foreign
claims, fell during the first
months of 2014 in all the
largest euro area countries.
Figure 4.16 – Change in foreign claims of banks vis-à-vis main European countries
banks
non-banks private sector
Italy
Italy
Germany
Germany
France
France
Spain
Spain
Dec 2010 - Dec 2013
Dec 2013 - Mar 2014
United Kingdom
-40%
-30%
-20%
-10%
0%
10%
20%
United Kingdom
-30%
-20%
-10%
0%
10%
20%
Source: calculations on Bank for International Settlements data. Figures on foreign claims of total banking
system in Italy, Germany, France, Spain and the United Kingdom and do not include exposures to the country of
origin. European countries for which foreign claims are availables are Austria, Belgium, Czech Republic, Denmark,
Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Poland, Portugal, Spain, Sweden,
the United Kingdom. For Italy the change Dec 2013 – Mar 2014 does not include exposures to Austria, the
Netherlands and Poland.
The decline in financial
fragmentation is also
signaled by the
improvements in the debtor
balances of peripheral
countries in the Target 2
payment system, driven by
the introduction of a
negative interest rate on
ECB deposit facilities.
Italy’s international
investment position
continued to be negative,
mainly because of valuation
effects.
Figure 4.17 – Target 2 imbalances and financial inflows
Target 2 imbalances
(euro billion)
net financial assets
(euro billion)
800
1.000
800
600
600
400
400
200
200
0
-200
0
-400
-200
-600
-400
-1.000
-800
2007
2008
Italy
2009
2010
Germany
2011
2012
2013
2014
France
Source: calculations on ECB and Central banks data.
Spain
2007
2008 2009
2010
2011
2012
2013
2014
Risk Outlook
8
39
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
Recourse to ECB funding
fell for Italian and Spanish
banks at 4.5% and 6% of
total assets, respectively,
as a consequence of the
early repayments of ECB
funds allotted during the 3years LTRO in December
2011 and February 2012.
Deposits with the ECB
continued to decrease. The
3 months Euribor rate
reached values near to zero
in September.
Figure 4.18 – Reliance on Eurosystem by credit institutions of some euro area countries and
ECB deposit facility
ECB deposit facility
(weekly data at 19/09/2014; billions of euro)
recource to Eurosystem financing
(percentage of bank assets)
12
900
6
10
750
5
8
600
4
6
450
3
4
300
2
2
150
1
0
0
2006 2007 2008 2009 2010
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2011
2012
Italy
2013
Germany
France
2011
2012 2013 2014
0
2014
deposit facilities
Spain
Euribor 3M (right scale)
Source: calculations on ECB and national central banks data.
The exposures of Italian
banks to emerging markets
is lower than 1% of total
assets, while Spanish and
English banks are the most
exposed (about 5% and
3,5% respectively)
Figure 4.19 – Foreign exposures of European banks to some emerging markets
5%
as % of total assets
4%
billions of euro
400
Turkey
Russia
India
China
300
Brazil
3%
200
2%
100
1%
2010
2011
2012
30-Sep-13
2010
2011
2012
30-Sep-13
2010
2011
2012
30-Sep-13
2010
2011
2012
30-Sep-13
2010
2011
2012
30-Sep-13
0
Italy
Germany
France
Spain
Mar-14
2010
2013
Mar-14
2010
2013
Mar-14
2010
2013
Mar-14
2010
2013
Mar-14
2010
2013
0%
United
Kingdom
Italy
Germany
France
Spain
United
Kingdom
Source: calculations on Bank for International Settlements data.
The link between bank and
sovereign risks, as measured
by dynamic correlation
between CDS spreads,
remained substantially
unchanged in the first nine
months of 2014, with Italy
and France recording the
highest values.
Figure 4.20 – Dynamic correlation between sovereign CDS spreads and bank CDS spreads
(daily data; six month moving average; 01/01/2010 - 30/09/2014)
0.8
0.8
0.7
0.7
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2
Italy
Germany
Spain
0.1
0
France
0.1
2010
2011
2012
2013
2014
0
2010
2011
2012
2013
2014
Source: calculations on Thomson Reuters Datastream data. Dynamic correlation has been estimated following
Engle (2002).
Risk Outlook
8
40
October 2014
Risk dashboards
1. Equity markets
2. Bonds markets
3. Non-financial companies
4. Banks
In 2014, contagion among
banks (as measured by the
joint probability of default
implied by CDS spreads
movements) reached values
near to zero, both in the
euro area and in Italy,
although slightly increasing
in September.
Figure 4.21 – Indicator of joint probability of default implied by CDS spreads
(daily data; 01/01/2010 – 30/09/2014)
1
Euro area - ex Italy
1
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0
Italy
0
2010
2011
2012
2013
2010
2014
2011
2012
2013
2014
Source: calculations on Thomson Reuters Datastream data. The Italian sample includes 5 groups; the euro area
sample includes 16 groups. Probabilities have been estimated by applying Markov switching regime model on
daily variations of 5-year credit default swap prices. The indicator has been normalised between zero (= low
probability of default) and one (= high probability of default).
During 2014, the perceived
credit risk of European
financial institutions kept
declining, as shown by the
trends in both the observed
values of CDS and those
implied by EDF. Italian
banks continued to be
perceived slightly riskier
than their European peers,
although the relative gap is
narrowing.
Figure 4.22 – Average 5-year CDS prices observed and implied by the expected default
frequencies (EDF) for main listed banks
(basis points; daily data; 31/01/2008 – 30/09/2014)
700
Europe - ex Italy
Italy
700
median observed values
600
600
median values implied by EDF
500
500
400
400
300
300
200
200
100
100
0
2008
2009
2010
2011
2012
2013
2014
0
2008
2009
2010
2011
2012
2013
2014
Source: calculations on Thomson Reuters Datastream and KMV - Credit Edge data.
The improvement in
European banks’ credit risk
perception is signaled also
by the ratings implied in
bond spreads and CDS prices
recorded at the end of
September. This
phenomenon was more
marked for Italian banks,
whose implied bond and
CDS ratings reached levels
higher than the official
rating.
Figure 4.23 – Rating implied by financial instruments prices
(monthly data; January 2007 – September 2014)
Europe - ex Italy
Italy
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
2007
2008
2009
2010
2011
2012
2013
2014
Moody's official rating
rating implied by bond spreads
rating implied by CDS prices
rating implied by stock returns
2007
2008
2009
2010
2011
2012
2013
2014
Source: calculations on Moody’s Implied Rating data. We report the average values for the banks included in the
Euro Stoxx 50 (except for Italian banks) and for the main listed Italian banks with Moody’s rating.

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